Scope Ratings AG has today confirmed the Kingdom of Norway's long-term local-currency rating at AAA, following the release of its revised sovereign rating methodology, and has converted its status from subscription to public. The agency has also assigned a long-term foreign-currency issuer rating of AAA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in local and foreign currency was also rated at AAA. All Outlooks are Stable.

Rating drivers

Norway’s rating is underpinned by sizeable fiscal and current account surpluses, though levels have declined somewhat in an environment of lower oil prices; a significant net public asset position rather than a net public debt position, driven by savings accumulated through the sovereign wealth fund, Global Pension Fund Global (GPFG); and strong fiscal, monetary and financial governance institutions.

Norway also benefits from low public debt and strong institutions, as a mature economy with one of the world’s highest per capita income levels (USD 70,813 in 2016). Challenges include adaptations to lower growth due to weakness in the petroleum sector, the corresponding long-run transition to a non-resource-dependent economy, and imbalances in the housing sector. The Stable Outlook reflects Scope’s assessment that the risks Norway faces remain manageable given the nation’s commensurate credit strengths.

The sharp oil price slump in 2014-15 has significantly weakened growth. In 2016, Norway’s headline GDP expanded by 1.1%, with mainland GDP (excluding the offshore oil and gas extraction and shipping sectors) growing just 0.9% (compared with a 2010-2014 average of 2.4%). In the latest Article IV, the IMF noted expectations for 1.2% growth in 2017 and 1.7% in 2018, bolstered by a recovery in the mainland economy to 1.7% and 2.3% for these two years. Supported by the stabilisation and partial recovery of oil prices, unemployment peaked in the summer of 2016 at 138,000 (4.9% of the labour force) and stood at 4.3% in the three months to June 2017.

The Norwegian economy is bolstered by accommodative fiscal and monetary policy. Norges Bank’s policy rate has remained at an all-time low of 0.5% since March 2016, with expectations it will remain at these levels until 2019.

With oil prices now lower for a longer period, it has become even more critical to bolster economic rebalancing away from dependency on oil and gas. Boosting growth in these non-oil sectors is challenging, however, due to low productivity growth, high labour costs (and, thus, competitiveness deficiencies), and falling labour force participation rates owing to an ageing population. The government recognises the gravity of this challenge and has considered the petroleum sector’s declining contribution to economic growth in coming decades – with projections of oil and gas production to decrease by 2060 to about 25% of 2015 levels. The government is committed to engineering a Norwegian economy for the future.

In Scope’s view, over the medium term, headline GDP should follow a somewhat contained growth path, averaging around 1.75%. Implicitly, this assumes labour productivity growth of around 1.0% (compared with a 2006-2016 average of 0.8%).

In response to the sharp decline in oil prices in 2014, the government has used fiscal policy to support the economy. The fiscal impulse in 2017 will amount to about 0.5% of mainland GDP. The general government surplus fell to 3.0% of GDP in 2016, from 6.0% in 2015. Given a higher Brent price in 2017 (averaging USD 52 per barrel as of the date of this writing), a higher consolidated surplus for 2017 of around 4.5% of GDP appears likely. The annual cash flow from the sovereign wealth fund for 2017 is expected at NOK 226bn (7.9% of mainland GDP), underpinning the general government surplus. The 2016 fiscal year represented the first year since the fund’s inception that GPFG transfers to the central government budget exceeded net petroleum revenues, a trend that is expected to continue – representing a structural shift.

Norway’s rating is backed by the nation’s significant fiscal strength, considering substantial net financial assets (of 289% of nominal GDP as of end-2016) rather than net liabilities. This net asset ratio is by far the highest in an ‘aaa’ peer analysis. Since its launch in 1990, GPFG has grown rapidly to its current level of about USD 1trn. The fund owns 1.3% of all globally listed companies. Following weakening of the krone, the fund’s market value in local currency has increased (to more than 280% of mainland GDP, from 166% at end-2012). The government recently announced a revision to the annual spending rule to 3% of fund assets (to be transferred annually to the central government budget), compared with the previous 4%. The prudent investment of Norway’s oil wealth, buttressed by the fiscal rule, is a material credit positive. In addition, the central government only issues debt to finance capital expenditure. Central government debt stood at 16% of GDP as of Q2, with general government debt at 37% of GDP (in Q1).

Norway faces significant long-term demographic challenges, driven by increasing life expectancy. In a baseline scenario from the Ministry of Finance, the growth of public expenditures exceeds that of public revenues between 2030 and 2060, resulting in an average financing requirement per decade of 1.7% of mainland GDP, for a total financing gap of 6.0% by 2060.

Norway held substantial current account surpluses (of more than 10% of GDP) from 2000 to 2014. This surplus fell under 10% in 2015 due to lower oil prices. The IMF expects current account surpluses of 5.9% and 6.0% in 2017 and 2018, up from 5.0% in 2016. In 2016, the net income balance, largely reflecting returns on external assets of GPFG, contributed more to the current account surplus than the goods and services balance – the first time since 1987 that the income balance was greater than that for goods and services, reinforcing a structural shift underlying both the fiscal and current account balances. Norway has an extremely strong net external asset position of 216% of GDP (or around 500% of current account receipts) as of Q1 2017, underpinned by GPFG’s investments abroad.

House price inflation accelerated to 10.1% year on year in Q4 2016, though the market cooled in 2017 to 7.0% YoY in Q2. Developments have been led by the Oslo capital region, where annual growth reached 21.6% in Q4 2016 before falling to 13.1% by Q2 2017. The persistently low interest rates, while bolstering the recovery from the recent oil price shock, could advance latent financial system imbalances, such as in the housing market. Average nominal house prices have increased substantially (+70%) since 2008 lows and a rapid correction represents an important economic vulnerability that could adversely impact the economy and financial stability.

High levels of household debt remain a risk. The household debt stock has increased by an average 6.5% annually since 2008. Presently, household debt stands at 237% of disposable income (in Q1 2017), an increase from 179% in 2005, pushed up by growth in mortgage credit. Norwegian households’ financial assets represent about 316% of disposable income, offsetting liabilities in nominal terms. However, more than one-third of these assets comprise pension entitlements, insurance assets and long-term loans, which cannot be easily monetised in a stress scenario. Following the Norwegian Financial Services Authority’s recommendations, the Ministry of Finance has adopted a series of macroprudential measures since 2015. Over time, an easing in house price growth and tighter lending standards should begin to decelerate household debt formation.

The largest banks have continued to increase capital ratios (DNB Bank, at 16.1% Common Equity Tier 1 as of Q2 2017) and are near their individual capital targets, which are themselves somewhat higher than regulatory requirements. Banks have shown solid profitability, though there is some uncertainty on future loan losses in the event of further restructurings in the oil-related sector.

Norway’s current minority government was formed after the 2013 elections, composed of the Conservatives and the Progress Party, with a support arrangement from the Liberal Party and the Christian Democrats. The next elections will take place on 11 September 2017. At present, opinion polls suggest a close contest. If the centre-left bloc led by the Labour Party achieves the stronger result, this would return politics to the Red-Green coalition existing prior to the 2013 election result, and imply a potential reversal of some Conservative Party policies over the past four years – including tax cuts passed during the oil price shock. Scope does not expect any material changes in Norway’s creditworthiness after elections next month.

Sovereign rating scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative “AAA” (“aaa”) rating range for the Kingdom of Norway. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on qualitative analysis. For the Kingdom of Norway, the following relative credit strengths have been identified: i) market access and funding sources, ii) excellent resilience to short-term external shocks, and iii) financial sector oversight and governance. Relative credit weaknesses are: i) current account vulnerabilities, and ii) macro-financial vulnerabilities and fragility. The combined relative credit strengths and weaknesses indicate a sovereign rating of AAA for Norway. A rating committee has discussed and confirmed these results.

For further details, please see Appendix 2 of the rating report.

Outlook and rating-change drivers

The confirmation of a Stable Outlook reflects Scope’s view that the risks Norway faces remain manageable given the nation’s material credit strengths.

The Outlook could be downgraded if: i) macroeconomic policy weakened significantly, threatening Norway’s long-run net public/external asset positions, and/or ii) if a sustained period of lower oil prices than those presently prevailing and/or a significant financial crisis, potentially exacerbated by domestic imbalances, were to occur, which materially damage Norway’s public sector balance sheet. Presently, Scope does not judge the likelihood of a rating downgrade to be high.

For the detailed research report, please click HERE.

Rating committee

The main points discussed by the rating committee were: (1) economic growth potential and outlook, (2) public finance performance, (3) external economic position, (4) banking sector performance and outlook, (5) reliance on petroleum industry, (6) sovereign wealth fund performance and outlook, (7) housing market and private debt developments, (8) peers consideration.

Methodology

The methodology applicable for this rating and/or rating outlook ‘Public Finance Sovereign Ratings’ is available on www.scoperatings.com.

The historical default rates used by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default and definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction in which a rating may change within the next 12 to 18 months. A rating change is, however, not automatically a certainty.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.

Rating prepared by Dennis Shen, Lead Analyst

Person responsible for approval of the rating: Dr Stefan Bund, Chief Analytical Officer

The ratings/outlook were first assigned by Scope as a subscription rating in January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.

The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the United Kingdom are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 21.07.2017 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent placement of ratings under review, in order to conclude the review and disclose ratings in a timely manner, as required by Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information

The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.

The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: Statistisk Sentralbyrå (Statistics Norway), Norges Bank, European Commission, Statistical Office of the European Communities, IMF, OECD, and Haver Analytics.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability

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