Scope Ratings GmbH has today affirmed the Kingdom of Norway's long-term local-currency rating at AAA. The agency has also affirmed the country’s long-term foreign-currency issuer rating at AAA, along with its short-term issuer rating at S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also affirmed at AAA. All Outlooks are Stable.

For the detailed rating report, click here.

Rating drivers

Norway’s rating is underpinned by sizeable dual fiscal and current account surpluses; a significant net public asset position rather than a net public debt position, driven by savings accumulated through the sovereign wealth fund, Government Pension Fund Global (GPFG); and strong fiscal, monetary and financial governance institutions.

Norway also benefits from low public debt, issued only to finance capital expenditure, and institutional strengths as a mature economy with one of the world’s highest per capita income levels (USD 73,615 in 2017). Challenges include imbalances in the residential and commercial property sectors, high household debt, and the difficult long-run transition to a non-resource-dependent economy. The Stable Outlook reflects Scope’s assessment that the risks Norway faces remain manageable given the nation’s commensurate credit strengths.

In 2017, Norway’s headline gross domestic product expanded by 1.8% YoY. The stabilisation in oil prices has also supported the mainland economy (excluding the offshore oil and gas extraction and shipping sectors), which grew by 1.8% YoY. In the October 2017 World Economic Outlook, the IMF revised 2018 growth estimates modestly downwards to 1.6% (from 1.9%) and 1.9% (from 2.1%) for 2019. Supported by the stabilisation in oil prices, unemployment (LFS) peaked in the summer of 2016 at 138,000 (5% of the labour force) and stood at 4.1% in the three months to December 2017. On the whole, Norway’s economic recovery has been supported by accommodative monetary, financial and global growth conditions, the depreciation of the krone and an expansionary fiscal stance, in addition to a stabilisation in Brent oil prices.

With oil prices now lower for longer, it has become even more critical to bolster economic rebalancing away from dependency on oil and gas. In Scope’s view, headline GDP should follow a somewhat contained growth path over the medium term, averaging around 1.75%. Implicitly, this assumes labour productivity growth of around 1.0% (compared with a 2008-2017 average of 0.7%).

In response to the sharp decline in oil prices in 2014, the government appropriately utilised counter-cyclical fiscal policy to support the economy. In 2018, with the recovery underway, the fiscal impulse will be moderated to under 0.1% of mainland GDP. The general government surplus improved to 5.0% of GDP in 2017, from 4.0% of GDP in 2016. In the 2018 budget, a smaller surplus of around 3.9% of GDP is envisioned.

Norway’s rating is backed by the nation’s significant fiscal strength, with substantial net financial assets (of 288% of nominal GDP as of end-2016) rather than net liabilities. This net asset ratio is by far the highest in a ‘aaa’ peer analysis. Since its launch in 1990, the GPFG has grown to its current level of about USD 1tn. Following the weakening of the krone, the fund’s market value in local currency has increased (to about 291% of mainland GDP at present from 166% at YE 2012). In November 2017, Norges Bank Investment Management (which manages the sovereign fund) proposed to remove oil and gas stocks from the GPFG’s benchmark index. Oil and gas equities currently account for around 6% of the GPFG's benchmark index or just over NOK 300bn. Should this recommendation be approved, Scope has a positive view of the potential divestment as it would diversify the fund’s holdings and reduce Norway’s exposure to future volatility and declines in petroleum prices. Central government debt stood at a low 18% of GDP as of Q3 2017, with general government debt at 35% of GDP in the same quarter.

Norway held substantial current account surpluses (of more than 10% of GDP) from 2000 to 2014. This surplus fell below 10% in 2015 due to lower oil prices. The IMF expects surpluses of 5.7% and 5.9% in 2018 and 2019, up from 5.5% in 2017, along with a medium-term current account surplus of about 6.1% of GDP by 2022. Norway has an extremely strong net external asset position of 207% of GDP (or around 433% of current account receipts) as of Q3 2017, which is underpinned by the GPFG’s investments abroad.

Scope’s August 2017 rating assessment on Norway identified house price inflation as a risk. Measured relative to per capita disposable income, house prices levels are substantially higher than pre-crisis. The ongoing correction has seen prices down 2.2% on an annual basis as of January 2018, with prices off a cumulative 3% from the March 2017 peak. The reversal in the housing market has followed the temporary tightening of residential mortgage lending, effective since 1 January 2017. The Ministry of Finance has asked the Financial Supervisory Authority to advise on the impact of the rules and whether they ought to be extended past expiry on 30 June 2018.

Persistently low interest rates, while bolstering the recovery from the recent oil price shock, could advance latent financial system imbalances, such as those in the housing and commercial real estate markets. Average nominal house prices have increased substantially (by more than 70%) since 2008 lows. In this context, Scope views the ongoing housing market correction in a constructive light, as a form of counter-cyclical reduction of prevailing imbalances while the Norwegian economy is growing near potential. This will reduce the possibility of a deeper (and longer) decline in prices at some later stage, which could easily contribute pro-cyclically to intensifying a simultaneous slowdown in the economy.

Housing risks are intertwined with high levels of household debt. Presently, household debt stands at 214% of disposable income (in Q3 2017), up from 144% in 2005. Norwegian households’ financial assets represent about 319% 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. Scope expects the authorities’ proactive macroprudential response alongside cooling housing markets to slow the pace of household debt formation over time.

The largest banks have continued to increase capital ratios (DNB Bank at 17.1% common equity tier 1 (CET1) as of Q3 2017) and have met their individual capital targets, which are themselves somewhat higher than regulatory requirements. An annual bank stress test by Norges Bank in 2017 showed banks’ buffers would be sufficient to absorb losses even in a scenario of a severe downturn in the Norwegian economy and the associated unwinding of financial imbalances. In the stress test, house prices fall by 25%–35% with rising default rates on both household and commercial loans. Weighted average CET1 capital ratios decline more than 4pp in the scenarios. Nonetheless, banks’ buffers cushion the shock, without the need for sovereign intervention. Even so, in such a situation, Norges Bank concluded that banks may tighten lending significantly, which could accentuate a crisis. While Scope is cautious regarding prevailing imbalances, the available financial, fiscal and external buffers to counter a significant downturn are a substantial credit strength.

Norway’s elections on 11 September 2017 brought a continuation of the centre-right government of the Conservative Party and the Progress Party. On 14 January 2018, the centrist Liberal Party joined the minority government.

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) economic policy framework; ii) market access and funding sources; iii) excellent resilience to short-term external shocks; and iv) 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) 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 and financial system balance sheets. At present, Scope does not judge the likelihood of a rating downgrade to be high.

Rating committee

The main points discussed by the rating committee were: (1) the commodity dependence of the Norwegian economy and its consequences for future growth, (2) fiscal performance and debt sustainability, (3) housing market vulnerabilities and macroprudential policies, (4) demographic challenges in the context of a high net public assets ratio.

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. 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 at 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 GmbH.
Rating prepared by Dennis Shen, Lead Analyst
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director, Public Finance
The ratings/outlook were first assigned by Scope as a subscription rating in January 2003. The ratings/outlooks were last updated on 18.08.2017.
The senior unsecured debt ratings as well as the short-term issuer ratings were last assigned by Scope on 18.08.2017.

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, Norway Ministry of Finance, Real Estate Norway, 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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.

Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 161306, Managing Director(s): Torsten Hinrichs (CEO), Dr. Stefan Bund.