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

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

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the Stable trend reflects Morningstar DBRS’ view that the risks to the credit ratings remain limited. Norway is well positioned to navigate challenging macroeconomic conditions, including elevated inflation and high interest rates. Following a strong expansion in 2022, mainland GDP, which excludes the petroleum-based offshore sector, grew by just 0.7% in 2023. The slowdown was largely due to high inflation and tighter financing conditions. We expect economic momentum will gradually accelerate in late 2024 and 2025. Nevertheless, the material increase in petroleum-sector revenues since 2022 has further strengthened Norway’s public sector balance sheet. Norway’s solid fiscal framework and the conservative management of its oil-related revenues will continue to provide the government with ample room to support the economy against severe shocks. In the face of lingering inflation pressures, Norges Bank kept its policy rate unchanged at 4.5% in its latest policy meeting. Consumer price growth eased to 3.3% (year-over-year) in September 2023 but then increased to 4.7% in January 2024. Elevated interest rates are putting upward pressure on the debt service costs for households and businesses. However, Norway’s strong fiscal position and strong public sector balance sheet continue to provide ample room to respond to potential challenges.

Norway’s AAA credit ratings are underpinned by its public sector wealth, prudent management of oil-related revenues, strong external position, and sound institutional framework. Norway’s strengths offset the credit challenges related to its high household indebtedness, the dependance on the petroleum sector, and the ageing population. Norway is well-positioned to deal with these challenges and has substantial buffers to absorb shocks. The country’s sovereign wealth fund (SWF), the Government Pension Fund Global (GPFG), had a market value of around Norwegian Krone (NOK) 15.8 trillion at the end of 2023, which is equivalent to more than 400% of mainland GDP. The GPFG acts as both a current source of income by supplementing the annual budget and as a source of resilience for the Norwegian economy.

CREDIT RATING DRIVERS

Norway is firmly placed in the AAA credit 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.

CREDIT RATING RATIONALE

Economic Activity Slows Down But Norway’s Fundamentals Remain Strong

Following 3.7% growth in 2022, Norway’s economic performance, measured by mainland GDP, moderated in 2023, with high inflation eroding real incomes and high interest rates weighing on household consumption and business investment. Mainland GDP is expected to have grown by 0.7% in 2023. Weak output growth is not expected to be prolonged and is not likely to have structural implications for the Norwegian economy. The 2024 National Budget forecasts 0.8% mainland GDP growth in 2024 on the back of improving real purchasing power and stronger external demand. Investment in petroleum services is expected to continue to support economic growth this year. Moreover, easing inflation and a tight labour market should support household consumption. Despite the weaker economic activity, the labour market has demonstrated resilience, with the registered unemployment rate at 2.1% in February 2024. At the same time, NOK’s depreciation is expected to boost export activity and strengthen the international competitiveness of Norwegian businesses.

Norway’s credit fundamentals are underpinned by its wealthy and stable economy, with a balanced income distribution. On the other hand, Norway is a small and open economy that is exposed to potential downturns in external demand. Norway’s conservative approach to managing oil revenues has helped to limit the economy’s vulnerability to oil price shocks, but dependence on the petroleum sector and successful diversification towards other tradable sectors pose challenges in the medium- to long-term.

Norway’s Very Strong External Position Provides a Significant Buffer to Absorb Shocks

Norway’s credit ratings benefit from the country’s very strong external position. High energy prices and increased exports of energy goods to Europe in 2022 led to a record high current account surplus of around 30% of GDP. The current account surplus narrowed to around 18% of GDP in 2023, mainly due to lower natural gas prices. Driven by large oil exports and a high savings rate, the current account surplus has averaged around 11% of GDP over the last ten years. From a stock perspective, Norway’s large positive net international investment position stood at 298% of GDP at the end of 2023, reflecting a substantial accumulation of foreign assets through the GPFG. In addition, Norway’s flexible exchange rate acts as a shock absorber. As measured by the import-weighted exchange rate index I-44, the Norwegian krone weakened last year, reflecting the low interest rate differential against other countries and developments in petroleum prices.

Solid Fiscal Framework And Very Low Public Debt Ratio Underpin Norway’s Credit Ratings

Norway’s robust public finances and conservative management of oil sector revenues underpin the AAA credit ratings. To avoid the impact of oil price volatility on government revenues, Norway’s fiscal framework stipulates that the State’s net cash inflow from the petroleum industry (receipts from the sale of oil and gas and oil and gas taxes) be transferred to the 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 3.0%. Norway’s GPFG is the world’s largest sovereign wealth fund, with a market value at around NOK 15.8 trillion at the end of 2023 and equivalent to approximately 4x mainland GDP. The market value of the Fund increased by NOK 3.3 trillion last year, mainly due to increased equity values, inflows of petroleum revenues, and the weaker Norwegian kroner.

Norway’s GPFG and strong fiscal metrics provide the government with ample fiscal space to help the economy withstand severe shocks, as demonstrated during the COVID-19 pandemic and the energy crisis. Government measures introduced to weather the impact of the pandemic resulted in a structural non-oil fiscal deficit as a percentage of the GPFG of 3.7% in 2020 and of 3.3% in 2021. In 2022, the sharp increase in gas prices led to an exceptionally strong performance for oil sector revenues. The net cash inflow from petroleum activity in 2022 amounted to NOK 1,285 billion, a historic record. The structural non-oil deficit was 2.7% as a share of the value of the GPFG in 2022. In 2023, the government expects a structural non-oil fiscal deficit of NOK 372.3 billion (equivalent to 3.0% of the value of GPFG). This is NOK 56 billion higher than originally budgeted, due to greater financial support for Ukraine and the cost of refugees, as well as measures to support real incomes due to high inflation. In 2024, due to the strong performance of the GPFG in 2023, the structural non-oil deficit (% GPFG) is projected at 2.7%, below the 3% threshold.

Norway’s public sector balance sheet is one of its key credit strengths relative to other AAA-rated peers. The general government gross debt ratio is one of lowest among advanced economies, at 44% of GDP in 2023. The non-oil budget deficit is financed by transfers from the GPFG and, therefore, does not trigger any borrowing requirement. The government borrows in local currency to fund government lending schemes, to ensure a well-functioning financial market in Norway, and to cover redemptions of outstanding debt. The large net asset position, standing at 361% of GDP in 2023, reflects its large sovereign wealth fund. The Norwegian government’s financial assets far exceed total debt. Norway’s low public debt ratio, along with the government’s asset position and its solid fiscal framework, place Norway in a very strong position to mitigate adverse shocks.

Norges Bank Has Kept The Policy Rate Unchanged; Financial Stability Risks Appear Contained Notwithstanding Vulnerabilities

Interest rates are expected to remain elevated and to weigh on indebted households. With inflation still well above the 2% target, the Norges Bank will likely be patient in any shift toward monetary easing. After raising the policy rate cumulatively by 450 basis points from September 2021 to December 2023, the central bank left the policy rate unchanged at 4.5% in its latest policy meeting. Norges Bank expects inflation to ease in the coming months, mainly due to lower prices of energy and imported goods.

The Norwegian banking system remains resilient and is well equipped to absorb the likely deterioration in credit quality due to the economic slowdown and elevated interest rates. Norwegian banks are liquid, profitable and well-capitalized, with the Common Equity Tier 1 (CET1) capital ratio remaining above 18.1% since 2022, according to the European Banking Authority (EBA). Their asset quality is also strong, with the non-performing loan (NPL) ratio below 1% in Q3 2023. However, there continue to be vulnerabilities related to the high level of household indebtedness and banks’ large exposure to the housing and commercial real estate (CRE) market. The high household debt-to-gross disposable income ratio at 238%, and the high share of mortgages at variable rate, makes households vulnerable to elevated interest rates and potential downturns in the real estate market. Signs of cooling started to emerge in the housing market last year. However, the trend reversed in the first two months of 2024. Norges Bank does not foresee a sharp decline in housing prices. The CRE market also remains a source of vulnerability. Banks’ exposure is estimated at around 50% of banks’ total corporate exposures. CRE companies in aggregate have a high debt-to-revenue ratio, and therefore are vulnerable to increases in interest rates and income losses. However, increases in CRE companies’ rental income will help most firms deal with high interest rates.

Vulnerabilities in the financial system are mitigated by Norway’s credible and independent monetary policy authority and proactive regulators, which have undertaken a series of banking regulatory measures and macro-prudential policies. These measures include among others requirements for borrowers to be able to tolerate up to a 7% rise in interest rates or a 3 percentage-point increase, a debt-to-income ratio ceiling at five times borrowers’ annual income, and a loan-to-value ratio of 85%.

Stable Political Environment and Strong Institutions Underpin Norway’s Credit Ratings

Norway benefits from a stable political environment and strong democratic institutions. The country enjoys a strong rule of law, a robust regulatory environment, and low levels of corruption. In addition, Norway has a highly credible macroeconomic policy framework. Following the October 2021 national elections, a center-left coalition, led by Jonas Gahr Stoere’s Labor Party and the Centre Party, formed a government that is expected to remain in power until the end of the legislative term in September 2025. The government is focused on the management of the energy sector and Norway’s relations with the European Union (EU).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The Resource and Energy Management factor is relevant to the credit ratings. Norway is one of the world’s largest oil and gas exporters, with the petroleum sector accounting for 23% of GDP and 39% of state revenues in 2023. The government has been preparing for a post-carbon future through its SWF, the GPFG, where oil proceeds are reinvested abroad, and therefore has become less vulnerable to volatility in commodity prices. Morningstar DBRS has taken these considerations into account within the ‘Economic Structure and Performance’ building block.

Social (S) Factors
There were no Social (S) factors that had a significant or relevant effect on the credit analysis.

Governance (G) Factors
There were no Governance (G) factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/430009/.

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 (6 October 2023) https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include the Ministry of Finance of Norway (National Budget 2024, Norges Bank (Monetary Policy Report - December 2023, Financial Stability Assessment 2023 H2 – November 2023, Statistics Norway, State accounts 2022 - Statsrekneskapen 2022, the Financial Supervisory Authority of Norway, Norges Bank Investment Management, International Energy Agency, International Monetary Fund (WEO - October 2023, IMF Country Report No. 23/272), BIS, Energy Information Administration, Real Estate Norway, the Social Progress Imperative (2024 Social Progress Index), Norwegian Petroleum, World Bank, Freedom House and Haver Analytics. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be 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

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS’ outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/430010/.

This credit 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: Michael Heydt, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: March 21, 2012
Last Rating Date: September 29, 2023

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