DBRS, Inc. (DBRS Morningstar) confirmed the Kingdom of Norway’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS Morningstar confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
Norway’s AAA ratings are underpinned by its public-sector wealth, prudent management of its oil-related windfalls, strong external position, and sound institutional framework. The confirmation of the Stable trend reflects our view that Norway’s credit fundamentals remain solid despite the economic and health fallout from the pandemic. The Norwegian economy has weathered the new coronavirus disease (COVID-19) shock better than its EU peers thus far. In addition to containing the spread of the pandemic, Norway’s economic structure and digital skills coupled with its significant resource capacity to support recovery resulted in a mild economic contraction of -1.3% in 2020. This was considerably less than the 6.2% contraction recorded by the EU. Moreover, unemployment rates have fallen from a high of 10.6% in March 2020 to 4.2% in March 2021. Norges Bank expects GDP growth of 3.8% in 2021 and 3.4% in 2022.
In addition to uncertainties of new virus variants or delays in vaccine distribution, Norway has structural challenges. The country is highly reliant on the petroleum sector, the household sector has high levels of debt, and the population is aging. However, Norway has substantial capacity to absorb shocks and to cope with challenges without downward pressure on the ratings. The key backstop is the sovereign wealth fund, the Government Pension Fund Global (GPFG or the Fund), that had a market value of nearly three times nominal GDP as of December 2020. Despite a large net transfer of NOK 310 billion (10% of GDP) from the Fund to the national budget to mitigate the impact of the pandemic, the market value of the Fund increased to NOK 10,914 billion as of December 2020 from NOK 10,084 billion on December 2019.
Norway is firmly placed in the AAA rating category but could be downgraded by one or a combination of the following factors: (1) a worsening of financial conditions and medium-term growth prospects that is severe enough to materially affect Norway’s financial stability and fiscal position; and (2) a significant loosening of the government’s commitment to a prudent fiscal policy.
Norway’s Economic Structure Results in Quick Rebound from COVID-19, But Medium Term Challenges Remain
Following the sharp 4.6% quarter-on-quarter fall in GDP in Q2 2020, economic activity in Norway is recovering. The recovery continued through the end of 2020 but for 2020 as a whole, the economy contracted by 1.3%, albeit significantly less severe than the EU average of -6.2%. Norway’s greater resilience to the pandemic reflects its economic structure, which is less reliant on the tourism and hospitality sectors that are more impacted by social distancing and mobility restrictions. Norway also had a relatively favorable starting position in terms of remote working and digital skills as well as sizable fiscal room to react with supportive measures. In addition, Norway adopted a lighter touch approach to control the pandemic with fewer restrictions as compared to other countries. For instance, Norway did not shut down factories or construction sites, and the country was among the first to open kindergartens. For more details please see Nordic Economies: Not Immune but More Resilient to the Coronavirus Disease (COVID-19)
The recent resurgence of the virus will likely weigh on the Q1 2021 growth outturn, but the gradual reopening of activities, the fall in the unemployment rate from 10.6% in February 2020 to 4.2% in March 2021, coupled with a rise in precautionary savings are likely to give a boost to household consumption as confidence likely rises in the coming months. Goods consumption has been strong thus far. Services consumption including culture, entertainment, and hospitality that comprise 10% of mainland GDP and one-sixth of total employment, is likely to pick up as containment measures are phased out. In addition, better than expected global conditions along with majority of the population likely to be vaccinated before the end of summer will likely boost economic activity and confidence. GDP is expected to return to pre-pandemic levels later this year with Norges Bank expecting growth to rise to 3.8% in 2021 and 3.4% in 2022 from -1.3% recorded in 2020. However, as a small and open economy, Norway remains exposed to potential downturns in external demand and a slow EU vaccine rollout could hinder Norway’s performance.
The pandemic shock, however, will likely result in some economic scarring. Norges Bank has lowered its projections for both productivity (due to business closures and lower investment) and labor force participation, and now pins potential growth at 1.2% (lower than previous projections of 1.6%). The drop in potential GDP as compared to the past where growth in Norway averaged 2.6% over the last two decades is primarily attributed to the Norwegian economic structure which is less diversified compared with other AAA rated sovereigns, with petroleum activities playing a central role. Over the medium- to long-term, the main challenge for the Norwegian economy will be to successfully re-tool the oil-dependent economy towards other tradable sectors as the windfalls from the petroleum sector gradually phase out.
Norway’s Strong Public Sector Balance Sheet and Prudent Fiscal Framework Underpin its Ratings
Norway’s solid fiscal framework and the public sector’s sizable net creditor position, due to its sovereign wealth fund, the Government Pension Fund Global (GPFG), has provided the country ample fiscal room (estimated at NOK 126 billion, 4.5% of mainland GDP in 2020) to respond to the coronavirus pandemic shock without affecting its AAA ratings. The GPFG where petroleum revenues are transferred in full, forms an integral part of the budget and fiscal policy framework, with fiscal rules limiting spending to the expected real rate of return on the fund, estimated at 3%. The guidelines further stipulate that petroleum revenue spending in any given year shall be adapted to the economic situation, as determined by the parliament. The Ministry of Finance has estimated that the excess transfers from the Fund for 2020 and 2021 will come to over NOK 300 billion per year. (10% of GDP).
As per the budget adapted in December 2020, the fiscal response and economic contraction due to the pandemic translated into Norway’s structural non-oil deficit rising to NOK 393.0 billion in 2020 (12.3% of mainland GDP), equivalent to 3.9% of the value of GPFG, from NOK 243.6 billion in 2019 (7.6% of mainland GDP). The Government’s budget proposal for 2021 envisages bringing down the spending of GPFG capital to the long-term fiscal guideline of 3 percent of the Fund. However with the rise in new COVID-19 infections in 1Q 2021, the government presented a new stimulus package in January 2021 resulting in slightly higher spending to the tune of NOK 65 billion. With this the non-oil deficit in 2021 is estimated at NOK 415 billion (10.9% of mainland GDP), equivalent to 3.3% of the GPFG. The fiscal impulse excluding adjusting for one off stimulus measures is expected to be expansionary reflecting the need to continue to support the economic until the pandemic is fully under control. Latest budget proposals includes comprehensive measures to bring people back to work, to restructure the economy, to contain infections and to support those directly affected by the restrictive measures. The budget numbers (both for 2020 and 2021) will be updated in the revised budget for 2021, which will be presented on May 11, 2021.
Norway’s public sector balance sheet constitutes one of its key credit strengths relative to other AAA-rated countries. General government gross debt, despite increasing from 40.6% of GDP in 2019 to 46.2% in 2020 (as per AMECO estimates) is largely due to the contraction in growth, remains one of the lowest debt ratios among advanced economies. In most countries, the main purpose of government borrowing is to finance a budget deficit. In Norway, the non-oil budget deficit is covered by transfers from the GPFG and therefore does not trigger any borrowing requirement. However, the government borrows in local currency to fund government lending schemes, to cover redemptions of existing debt, and to ensure a well-functioning financial market in Norway. DBRS Morningstar expects the general government gross debt ratio to fall and then stabilize at around 40% of GDP in the coming years. The current negative shock has been affecting net rather than gross government debt.
With financial assets far exceeding total debt, the government’s net asset position currently stands at 287.2% of GDP as of Q4 2020. This is largely explained by the sovereign wealth fund whose market value was NOK 10,914 billion or 320% of mainland GDP at the end of December 2020. Given the fiscal guidelines and the government’s asset position, Norway’s gross government debt is generally insulated from negative shocks. This accounts for the one category uplift in the “Debt and Liquidity” building block qualitative assessment.
Norges Bank Likely to Begin Normalizing Rates in H2 2021; Property Markets Remain a Concern
Similar to central banks across the globe, Norges Bank responded to the COVID-19 shock with a mix of conventional and unconventional policy tools. The bank cut its policy rates by 150 bps from 1.5% in February 2020 to 0.0% in May 2020 and introduced a number of emergency lending programs in both Norwegian krone and U.S. dollar. These measures helped stabilize financial conditions, with credit spreads narrowing across a variety of markets and equity prices rebounding. In its latest policy meeting on March 17, 2021, the Monetary Policy and Financial Stability Committee decided to keep the policy rate at 0.0%. However, with clear signs that economic conditions are improving and that financial imbalances are rising, Norges Bank is likely to gradually normalize monetary policy and begin raising policy rates in H2 2021.
Norwegian banks remain liquid, profitable, and well-capitalized with the weighted average Common Equity Tier 1 (CET1) capital ratio for the seven largest banks, at 19.1% as of Q4 2020. However, the overall system has some structural vulnerabilities. Norwegian banks have a large exposure to both the residential and commercial real estate market. Financial imbalances have built up as housing prices and household debt outpaced disposable income growth. Fueled by lower residential mortgage rates, growth in household income, high net immigration, and supply constraints, real house prices have been rising for over two decades. As a result, the household debt-to-disposable income ratio rose from 128% in 2001 to 234% in 2020. The system has seen a further build up in financial imbalances due to COVID-19 related measures. House prices fell in March and April last year, but the twelve month change in house prices was 9.7% in February 2021 as lower interest rates and temporary easing of the residential mortgage regulation have stimulated housing demand. Bank’s exposure to commercial real estate currently at 40% of total corporate exposures is another vulnerability in the financial system. In 2020 Q4, rents for prime office space in Oslo were back to pre-pandemic levels. Selling prices for the same segment fell in the first half of 2020, but the decline was more than reversed in the latter half of the year.
Against this background, Norway benefits from a credible and independent monetary policy authority and proactive regulators. The government has been taking several measures to reduce vulnerabilities in the housing market reflect increased financial vigilance by authorities. Current regulations include limiting the debt-to-income ratio to five times the borrower’s annual income and the loan to value ratio at 60% for secondary housing in Oslo. The flexibility quota, the mortgage regulation which allows a certain amount of a lender’s approved loans to deviate from the requirements in the regulation, has been brought back to pre-pandemic levels at 10% for loans outside Oslo and 8% in Oslo. Nonetheless, banks’ low loan losses (For 2020 as a whole, losses amounted to approximately 0.6% of exposures) and strong capital buffers mitigate the risks to financial stability. The countercyclical capital buffer requirement was set at 2.5% reflecting the build-up of financial imbalances, primar¬ily in credit and real estate markets, but has since been reduced to 1.0% in March 2020.
Norway’s Strong External Position Provides a Significant Buffer to Absorb Shocks
Norway benefits from a strong external position. Its external accounts are characterized by a structural current account surplus and a positive net creditor position. The persistent current account surpluses, averaging 10% of GDP over the last two decades, reflect Norway’s sizeable energy surplus, high per-capita income levels, and high savings rate. Its large positive net international investment position of 286.4% of GDP is due to the substantial accumulation of foreign assets through the GPFG. In addition, its flexible exchange rate regime facilitates adjustments, acting as an automatic stabilizer and tends to depreciate when a pronounced negative shock occurs. The Norwegian krone, as measured by the import-weighted index I-44, fell to record-weak levels under the market stress in March 2020. Since then, the krone has appreciated against most currencies and is now back at pre-pandemic levels. Reduced uncertainty in global financial markets and a rise in oil prices likely contributed to the krone appreciation.
A Predictable Policy Framework Supports Norway’s Ratings
Norway benefits from strong political institutions with an established track record of a consensus-based approach to macroeconomic policy. The country is characterized by strong rule of law, a robust regulatory environment, and low levels of corruption and scores above the 95th percentile across the World Bank’s governance indicators. The country benefits also from a a stable and predictable policy framework. The minority center-right coalition government of Prime Minister Solberg, elected in 2017 and composed of the Conservatives and the Liberals, has relied thus far on the parliamentary support from the Christian Democratic Party to pass legislation. The coalition has seen several cabinet reshuffles due to issues surrounding immigration and climate change. The next parliamentary elections are scheduled later this year in September.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/376984.
DBRS Morningstar notes that this document was amended on April 28, 2022 to remove the disclosure for unsolicited ratings in the U.S.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
All figures are in Norwegian Krone (NOK) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments (July 27, 2020).Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3 2021).
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
The primary 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, UN, IMF, BIS, Energy Information Administration, Real Estate Norway, World Bank and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
This rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on this issuer took place on October 25, 2020.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Rohini Malkani, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson; Managing Director, Co-Head Global Sovereign Ratings
Initial Rating Date: 21 March 2012
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