DBRS Morningstar Confirms the Kingdom of Norway at AAA, Stable Trend

DBRS Ratings Limited (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
The confirmation of the Stable trend reflects our view that risks to Norway’s ratings remain limited. Norway’s solid public sector metrics and strong economic recovery after the pandemic offset the risks caused by the high inflation and weaker external environment. Thanks to Norway’s proactive policies, output surpassed its pre pandemic level output already in the third quarter of 2021 faster than most of its European peers, with mainland GDP growth coming in at 4.1% in 2021 from -2.3% in 2020. The labor market has recovered with employment higher than pre-pandemic levels. The Russian invasion of Ukraine has increased the uncertainty on the economic outlook and intensified the inflationary pressures prompting Norges Bank to raise its policy rate from 1.75% to 2.25% in September 2022. Despite the elevated risks, in DBRS Morningstar’s view Norway’s strong fiscal position and the very low debt ratio continue to provide ample room to support the economy if needed.

Norway’s AAA ratings are underpinned by its public-sector wealth, prudent management of its oil-related revenue windfalls, strong external position, and sound institutional framework. On the other hand, Norway faces several structural challenges related to its high household indebtedness, the dependance on the petroleum sector, and the ageing population. Nevertheless, Norway is well-positioned to deal with these challenges and has substantial buffers to absorb shocks. Norway’s sovereign wealth fund (SWF), the Government Pension Fund Global (GPFG), with a market value of NOK 11.7 trillion that is equivalent to around 340% of mainland GDP in H2 2022, provides a substantial buffer against potential shocks. The GPFG acts as both a current source of income (supplementing the annual budget) and a future source of resilience as reflected by the large transfers to the national budget seen during the pandemic.

RATING DRIVERS
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; or (2) a significant weakening of the government’s commitment to a prudent fiscal policy.

RATING RATIONALE

Following a Strong Economic Recovery in 2021, the War in Ukraine Adds to Uncertainty to the Outlook

Norway’s economy rebounded strongly in 2021 growing by 4.1%, after a mild real GDP contraction of 2.3% in 2020, benefiting from strong policy support through the pandemic. Both employment and unemployment rates have returned to pre-pandemic levels, with the unemployment rate down to 3.1% in July 2022 from the peak of 5.5% registered in August 2020. However, the implications of Russia’s invasion of Ukraine have clouded the economic outlook, despite the small financial and trade interlinkages with the two countries. The main risks to the outlook are related to higher inflation, rising interest rates and lower external demand. Norges Bank in its September 2022 monetary policy review forecasts mainland GDP to rise by 2.8% in 2022, revised downwards from its previous forecast of 3.5%, with consumption and exports as the main drivers this year. For 2023 Norges Bank forecasts mainland GDP growth to decelerate at -0.3% as higher inflation and increased interest rates will weaken household purchasing power dampening private consumption.

Norway’s credit fundamentals are underpinned by its wealthy and stable economy, with a balanced income distribution. On the other hand, as a small and open economy, Norway remains exposed to potential downturns in external demand, and a prolonged conflict in Ukraine could hinder Norway’s performance along with the rest of Europe. Norway’s conservative approach to managing oil revenues has helped to limit the economy’s vulnerability to oil price shocks, but the dependence on the petroleum sector and successful diversification away from the oil-dependent economy towards other tradable sectors pose challenges in medium- to long-term.

Norway’s Benefits from Strong External Position, Which Provides a Significant Buffer to Absorb Shocks

Norway’s external accounts are characterized by a structural current account surplus and a positive net creditor position. The current account surplus averaged around 8.0% of GDP over the last ten years, driven by large oil exports, high per-capita income levels, and a high savings rate. The current account surplus surged to 15.0% of GDP in 2021 and due to impact of higher energy prices is expected to widen further in 2022 before returning back to its historical pattern. Norway is one of the largest exporters of natural gas in the world and with its exports contributes to efforts of European countries to reduce their reliance on Russian gas. Norway has increased its production to help offset the decline of flows of Russian gas, representing now Europe’s largest supplier of natural gas. Norwegian exports of natural gas have increased this year to the end of August by 315% (from NOK 187.0 billion to NOK 775.7 billion) compared to the same period in 2021, mainly due to the elevated energy prices. From a stock perspective, Norway’s large positive net international investment position of 226.1% of GDP in Q2 2022 reflects substantial accumulation of foreign assets through the GPFG. In addition to this, Norway’s floating currency acts as a shock absorber in the face of the global economic volatility. The krone, as measured by the import-weighted exchange rate index I-44 has weakened since the beginning of the year.

Norway’s Creditworthiness is Underpinned by Solid Fiscal Framework and Low Public Ratio

Norway’s credit fundamentals are underpinned by its solid fiscal framework and conservative management of the oil sector revenues. Under Norway’s fiscal framework, the revenues generated from the petroleum activity (receipts from the sale of oil and gas reserves and oil and gas taxes) are transferred to the Government Pension Fund Global (GPFG), with the proceeds invested entirely overseas. The fiscal rule also requires that the transfers from the GPFG to the national budget over time should be limited to the expected real return of the fund, estimated at 3%. Norway’s GPFG is the world’s largest sovereign wealth fund, with market value at NOK 11.7 trillion (equivalent to around 340% of mainland GDP) in H2 2022. Due to equity market losses in the first half of the year the market value of the fund has dropped by NOK 682 billion compared to 2021, however the elevated energy prices will likely lead to increased inflows from petroleum revenues.

Norway’s GPFG and strong fiscal metrics before the pandemic provided the government with ample fiscal space to withstand the pandemic shock. The support measures to mitigate the adverse impact of the pandemic on households and businesses resulted in structural non-oil fiscal deficit of NOK 361.1 billion in 2020 (3.6% of GPFG) and NOK 379.7 billion in 2021 (3.2%), rising from NOK 223.8 billion (equivalent to 2.7% of the value of GPFG) in 2019. In 2022 the structural non-oil deficit is estimated at NOK 335.1 billion (2.6% of the GPFG). The government has introduced a package of measures to support households and businesses to deal with the elevated electricity bills, by providing subsidies to electricity bills. The Norwegian government has also proposed an additional NOK 3 billion in spending to increase the preparedness of its armed forces, taking defense spending to 2% of mainland GDP.

Norway’s solid public sector balance sheet is one of its key credit strengths relative to other AAA-rated peers, with the general government gross debt ratio remaining one of lowest among advanced economies, at 43.2% of GDP in 2021. The non-oil budget deficit is financed by transfers from the GPFG and therefore does not trigger any borrowing requirement. During the pandemic the additional spending requirements were financed by larger transfers from the GPFG. However, the government borrows in local currency to fund government lending schemes, and to ensure a well-functioning financial market in Norway. IMF expects the general government gross debt ratio to slightly decline this year and stabilize below 40% of GDP in the following years.

Norway’s financial assets far exceed total debt, with the government’s net asset position standing at 299.2% of GDP in H2 2022, which is explained by its large sovereign wealth fund. In DBRS Morningstar’s views that Norway’s low public debt ratio along with the government’s asset position and its solid fiscal framework place Norway in an excellent position to mitigate adverse shocks and therefore support a positive adjustment in the ’Debt and Liquidity’ building block.

Norges Bank Raises Rates Back to Pre-pandemic Levels; Financial Vulnerabilities Remain

In light of higher than projected inflation in its latest policy meeting on September 21, Norges Bank decided to further tighten monetary policy. Norges Bank increased the policy rate to 2.25% from 1.75% in August 2022. Norges Bank was the first central bank among the advanced economies to raise rates in September 2021 and has continued with its gradual hiking cycle. Headline Consumer price index (CPI) reached 6.5% YOY in August, mainly due to the elevated energy prices. The central bank expects inflation of 5.4% this year and 4.5% in 2023. The Norges Bank’s current projections on the economy suggest further interest rate increases are likely in November.

The main risks to financial stability remain linked to the high level of household indebtedness, which has outpaced disposable income growth. Household debt-to-disposable income ratio stands high at 217.9% in Q4 2021, making households vulnerable to increases in interest rates and declines in housing prices. The housing market has experienced a period of rapid price growth fueled by low interest rates, population growth, growth in household income, and supply constraints. According to Real Estate of Norway, house price inflation has moderated from double-digit levels in 2021 to 5.8% YOY in August 2022. The slowdown in house price inflation is attributed to higher lending rates and a normalization of household consumption patterns. In addition, the high banks’ exposure to commercial real estate which currently represents around 50% of banks’ total corporate exposures is a source of vulnerability. CRE companies are highly leveraged, and therefore vulnerable to increases in interest rates and income losses. However, high equity ratios render them more resilient to price falls.

The Norwegian banking system remains liquid, profitable and well-capitalized, with the weighted average Common Equity Tier 1 (CET1) capital ratio for the seven largest banks at 18.1% at in Q2 2022. The asset quality of the Norwegian banking sector remains very strong, with the non-performing loans (NPLs) as a share of total gross loans at 0.7% in Q4 2021. Norway benefits from a credible and independent monetary policy authority and proactive regulators. In order to enhance the resiliency of the financial system, the authorities have undertaken a series of banking regulatory measures and macro-prudential policies, including a debt-to-income ratio ceiling at five times borrowers’ annual income and the loan-to-value ratio at 60% for secondary housing in Oslo.

Norway’s Ratings Are Supported by Its Strong Institutions

Norway benefits from strong political institutions and stable political environment as reflected in the World Governance Indicators. The country is characterized by strong rule of law, a robust regulatory environment, and low levels of corruption, with a stable and predictable policy framework. After two consecutive terms under the minority center-right coalition, a new center-left coalition was appointed by King Harald V on October 14, 2021. The new government consists of a center-left coalition between Jonas Gahr Stoere’s Labor Party and the Centre Party. DBRS Morningstar expects the coalition to rule until the end of the legislative term and to focus on management of the energy sector and Norway’s relations with the European Union (EU).

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The Resource and Energy Management factor is relevant to the ratings. Norway is one of the world’s largest oil and gas exporters, with the petroleum sector accounting for 20.5% of GDP and 20.8% of state revenues in 2021. Despite having one of the largest oil and gas reserves in Europe, 98% of Norway’s domestic energy consumption has been mainly sourced from renewable energy. The government has been preparing for a post-carbon future through its sovereign wealth fund, the Government Pension Fund Global, where oil proceeds are reinvested abroad, and therefore has become less vulnerable to volatility in the commodity prices. DBRS Morningstar has taken these considerations into account within the ‘Economic Structure and Performance’ building block.

There were no Social/Governance factor(s) that had a significant or relevant effect on the credit analysis

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/403787.

Notes:
All figures are in 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/401817/global-methodology-for-rating-sovereign-governments (August 29, 2022).
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-andgovernance-risk-factors-in-credit-ratings (May 17, 2022).

The sources of information used for this rating include Government of Norway, the Ministry of Finance of Norway (Revised National Budget 2022, Key Figures in the National Budget 2023, Norges Bank (Monetary Policy Review September 2022, Financial Stability Report 2021: vulnerabilities and risks), Statistics Norway, the Financial Supervisory Authority of Norway, Norges Bank Investment Management, Norsk Forbund for Innkjop og Logistikk/Danske Bank, TNS Gallup, UN, IMF (2022 Article IV, September 2022), BIS, Energy Information Administration, Real Estate Norway, WEF, the social progress imperative (Social Progress Index), Norwegian Petroleum, World Bank and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

DBRS Morningstar 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.

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 under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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.

The sensitivity analysis of the relevant key rating assumptions can be found at https://www.dbrsmorningstar.com/research/403791.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Spyridoula Tzima, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Managing Director, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: March 21, 2012
Last Rating Date: April 8, 2022

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