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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Norway’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at AAA. Scope has also affirmed the short-term issuer ratings at S-1+ in local- and foreign-currency. All Outlooks are Stable.

Summary and Outlook

Norway’s AAA rating is underpinned by the following credit strengths: i) the country’s economic resilience and expected post-crisis fiscal surpluses; ii) a significant net public asset position rather than a net public debt position, driven by savings accumulated through its sovereign wealth fund, the Government Pension Fund Global (GPFG); and iii) 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. Challenges relate to: i) high and rising household debt and imbalances in the residential and commercial property sectors; and ii) the long-run transition to a non-commodity-dependent economy.
The Stable Outlook reflects Scope’s view that the risks to the ratings over the next 12 to 18 months are balanced.

The ratings/Outlooks could be downgraded if, individually or collectively: i) a significant weakening in macroeconomic policy threatens Norway’s long-run net public and external asset positions; ii) a financial crisis, potentially exacerbated by domestic imbalances, materially damages Norway’s public sector and financial system balance sheets, and/or iii) significant shortcomings in addressing climate transition risks arise, resulting in a rapid increase in stranded asset risks.

Rating rationale

The first driver for the affirmation of Norway’s AAA ratings relates to the country’s economic resilience demonstrated during the pandemic and expected post-crisis fiscal surpluses. Headline GDP declined by a moderate 0.8% in 2020 compared with an average EU decline of around 6%. The economic lockdown in response to the Covid-19 pandemic caused a sharp contraction in GDP in the first half of 2020. Economic activity rebounded quickly as lockdown restrictions were eased over the summer and subsequently fluctuated in line with infection rates. Norway introduced fewer restrictions than most EU countries and, following the vaccination roll-out, the government started to gradually ease the remaining restrictions from April 2021 onwards. Mainland GDP expanded by 1.4% during Q2 2021 and has since exceeded its pre-pandemic level. Sectors that were severely hit by the pandemic, particularly the services sector including personal services as well as accommodation and food services, are expected to be important drivers of the continued recovery. Savings accumulated during the pandemic will also support strong growth in consumption as economic output returns to its pre-pandemic trend. Scope expects growth to reach 3% in 2021, rising to 3.9% next year before stabilising near its medium-term potential of around 1.5%-2.0% as monetary and fiscal support measures are reduced. Unemployment reached a new high of 5.3% during the summer of 2020 and has since fallen to 4.2% in the three months to July 2021. Scope believes that the continued recovery in the services sector will result in further declines in the unemployment rate over the coming months and in 2022. While Scope does not expect any significant long-term economic scarring, one challenge in the near term will be to address the rise in the number of long-term unemployed to avoid skills erosion and ultimately withdrawal from the labour market.

The general government budget stood at a deficit of 6.1% for the first time in 2020 following several decades of consistent government surpluses before the pandemic, supported by revenues from the oil and gas sector. Since the inception of Norway’s sovereign wealth fund, transfers to the central government budget from the fund have only exceeded net petroleum revenues on two occasions – in 2016/17 during a slump in oil prices and in 2020 due to the increased spending needed to respond to the pandemic. Norway’s strong fiscal position provided the government with ample capacity to implement the necessary countercyclical measures. The Ministry of Finance estimates that the total amount of direct support measures in 2020 and 2021 amounted to NOK 233bn (7% of GDP in 2020), including NOK 104bn for businesses, NOK 79bn for sectors deemed critically important and NOK 79bn for households. While pandemic support measures are being withdrawn, fiscal policy will remain accommodative with support aimed at increasing economic activity and helping the unemployed to return to work. A broadly balanced budget is therefore expected next year before returning to continued surpluses.

Norges Bank was the first among the advanced economies’ central banks to raise the policy rate since the onset of the pandemic from 0% to 0.25% in September 2021. Given Norway’s resilience during the pandemic and as economic activity is starting to normalise, Norges Bank also aims to gradually normalise monetary policy rates. Inflation expectations remain well anchored, although capacity constraints and labour shortages could lead to some upward pressure on prices and wages in the near term. The IMF expects inflation to reach 2.6% in 2021 before falling to the target rate of 2% in 2022. Rising energy costs will continue to exert upward pressure on inflation over the winter. Due to limited transmission capacity this will be particularly felt in the south, while central and northern Norway will be less impacted thanks to more favourable weather conditions and fewer energy exports. Scope expects further increases in the policy rate in December followed by another three rate hikes in 2022, with the rate reaching 1.25% by the end of next year.

The second driver supporting Norway’s AAA rating is the country’s significant net public asset position rather than a net public debt position, benefitting from savings accumulated through the sovereign wealth fund, the GPFG. The country holds substantial net financial assets amounting to 370% of nominal GDP as of end-2020. The financial assets consist mainly of deposits with Norges Bank, financial investments through the GPFG, equity holdings in domestic enterprises, and lending to or direct investments in state banks and state enterprises. 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 size of about USD 1.36trn or around 400% of mainland GDP. Assets of the fund are invested abroad and divestment from oil and gas shares in recent years has helped to diversify the country’s wealth away from the sector. The prudent investment of Norway’s oil wealth, combined with the fiscal rule targeting annual transfers to the budget of 3% of GPFG assets, is a significant credit-positive. Using the fund to delink the generation and use of petroleum revenues bolsters fiscal and economic sustainability. It provides a formidable tool for business cycle smoothing, eases the effects of oil price volatility on the mainland economy, decreases the potential for short-term overspending and provides the foundation for long-term investment to benefit future generations.

The GPFG allows Norway to fund any non-oil budget deficits through transfers from its sovereign wealth fund, rather than through debt issuances. The government therefore only borrows in local currency to fund government lending schemes, cover existing debt, ensure that the government has sufficient cash reserves, and provide for a well-functioning financial market. As a result, general government debt levels were not significantly impacted by the pandemic-related support measures, with debt rising from 40.9% in 2019 to 41.4% in 2020. Scope expects debt to peak at 42.7% of GDP in 2022 before declining towards 40% by 2026.

Norway’s structural non-oil fiscal deficit amounted to 2.9% of the value of the GPFG in 2019, rising to 3.6% in 2020 and likely to remain at this level in 2021. The Ministry of Finance expects the continued accommodative fiscal stance to provide a fiscal impulse of 0.6% of GDP in 2021. The continued support measures have shifted from emergency support towards encouraging a return to work and will be phased out by the end of the year. Scope therefore believes that the structural non-oil fiscal deficit will return below the target of 3% of the GPFG’s assets in 2022, resulting in a significant reduction of transfers.

Despite these credit strengths, Norway’s ratings face the following medium-term credit challenges.

First, long-standing financial vulnerabilities related to high household debt and exposures to commercial real estate have increased as a result of the pandemic. Average nominal house prices have surged to all-time highs, climbing by around 13% since the onset of the pandemic and almost doubling since the 2008 financial crisis. The hike in prices was fuelled by rising household income, supply constraints and, more recently, the reduction of the key policy interest rate to 0%. The increase of the policy rate in September has resulted in a slight rise in demand for fixed-rate mortgages and banks have reported lower margins on their residential mortgage lending¹. Scope believes that the expectation of future policy rate increases, in combination with rising housing starts, will moderate house price growth over the next year.

Real estate sector risks are intertwined with high and rising levels of household debt, which reached a new peak at 233% of disposable income in Q2 2021 compared with 185% in Q2 2007 before the global financial crisis. While households’ debt service ratios have also gradually increased over this period, low interest rates have helped to reduce the average households’ interest burden from 6.2% to 4.5% of disposable income. Norway is vulnerable to any significant market corrections, which could adversely impact both the economy and financial stability, compounded by Norway’s high home-ownership rate of more than 80%. Macroprudential measures for consumer borrowing include loan-to-value limits of 85% on residential mortgages and the requirement that lenders make allowance for an interest rate increase of five percentage points when assessing debt serviceability². Scope views the tighter mortgage lending requirements since 2015, and the announcement that they will be extended until end-2024, as a credit-positive. As previously highlighted by Norway’s Financial Supervisory Authority³  and the IMF⁴ , the authorities should consider tightening current macroprudential measures in case of continued strong house price growth and further evidence of market imbalances.

Loan losses in the commercial real estate sector have been high in past global crises and structural changes, such as increased remote working and online shopping, have been accelerated by the pandemic. Large price corrections in the commercial real estate market could result in material losses on banks’ balance sheets since loans to the sector account for around 40% of banks’ total corporate exposures⁵. In Norges Bank’s latest lending survey, banks reported that loan-to-value ratio requirements for office property loans have so far been unaffected by the rise in remote working. In addition, both maturities and loan-to-value ratios have been broadly in line with or somewhat below pre-pandemic levels.

Non-performing loans have remained below 1% throughout the pandemic and regulatory tier 1 capital ratios exceeded pre-pandemic levels in Q2 2021. Norges Bank’s 2020 bank stress test indicated that banks will continue to satisfy the capital requirements by an ample margin, have sufficient access to funding, and have the capacity to provide credit to keep supporting the recovery. Scope believes that banks’ losses related to household debt will be moderate as a result of generous unemployment benefits and sufficient liquid asset buffers held by households. Norwegian households’ financial assets represent about 359% of disposable income, offsetting liabilities in nominal terms. However, over one-third of these assets comprise pension entitlements, insurance assets and long-term loans, which cannot be easily monetised in a stress scenario.

While Norway’s Ministry of Finance remains the main macroprudential decision-maker in Norway, the decision-making authority for the countercyclical capital buffer has been delegated to Norges Bank. The Monetary Policy and Financial Stability Committee confirmed that the capital buffer will be raised to 1.5% with effect from 30 June 2022⁶. The decision is based on an assessment that households and creditworthy businesses will have sufficient access to credit even under the higher requirements. Norway currently has one of the highest countercyclical capital buffer rates in the EU. Continuing to raise the buffer as the economy recovers from the pandemic shock and monetary policy normalises will enhance Norway’s resilience to future crises. Scope has a constructive view on the macroprudential governance steps being taken to address financial imbalances in consideration of the outstanding risks.

Second, Norway remains highly reliant on the oil and gas sector, exposing it to long-run transition challenges such as stranded asset risks. The decision to continue oil exploration on the Norwegian shelf had broad political support and the latest licensing round saw continued demand from oil companies, with 31 companies filing applications. Still, a faster than expected transition away from fossil fuels in Norway’s key export markets, notably the EU, would increase vulnerability for the sector given the long planning horizons required for exploration activities.

In Scope’s view, the government has prudently prioritised the restructuring of the national economy with the aim of reaching climate neutrality by 2050 and further diversifying sources of economic growth. The decision to divest companies solely dedicated to oil and gas exploration and production from the GPFG’s benchmark index also helps to diversify the country’s wealth away from the sector. The new governing coalition has stated that it intends to make the country’s sovereign wealth fund more active in pushing for companies in its portfolio to reduce their environmental impact. Additional policies to support the economy’s transition include a robust greenhouse emissions taxation framework, which would more than triple carbon taxes from EUR 60 per tonne currently to EUR 200 by 2030. Several other measures, including subsidies for electric cars and investments in renewable energy, should also support the country’s transition.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative rating of ‘aaa’ for the Kingdom of Norway. This indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For the Kingdom of Norway, the following relative credit strengths have been identified: i) monetary policy framework; ii) fiscal policy framework; iii) debt sustainability; iv) debt profile and market access; v) strong resilience to short-term external shocks; vi) low social risks; and vii) low institutional and political risks. Relative credit weaknesses are: i) current account vulnerabilities; and ii) macro-financial vulnerabilities and fragility due to financial imbalances.

The combined relative credit strengths and weaknesses indicate a sovereign rating of AAA for Norway.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during its ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the qualitative overlay (QS).

Norway’s performance on ESG factors supports the country’s AAA sovereign rating. With respect to environmental risks, Norway receives high scores in all CVS indicators. These include carbon emissions per unit of GDP, exposure and vulnerability to natural disaster risks, and the ecological footprint of consumption compared with available biocapacity. Scope assesses Norway’s QS adjustment for ‘environmental risks’ as ‘neutral’ given the significant medium-term transition risks towards a non-commodity dependent economy.

Factors related to Norway’s social profile are captured in Scope’s CVS, where the country benefits from low income inequality and high labour force participation. Long-run demographic trends also remain a credit strength, with Norway’s old-age dependency ratio forecast to reach 40% by 2050 according to Eurostat, a level similar to that of Sweden and below that of most peers. The country ranked first in the United Nation’s 2019 Human Development Index – an indicator predicated on life expectancies, educational achievement and income levels. Scope’s QS assessment of Norway’s ‘social risks’ is strong, reflecting the country’s strong social safety net and inclusive labour market, as well as favourable demographic dynamics compared to the country’s ‘aaa’ sovereign peer group.

Governance-related factors are explicitly captured in Scope’s assessment of ‘institutional and political risk’ as part of its methodology. Here, Norway has the highest CVS score of Scope’s rated sovereign universe on a composite index of six World Bank Worldwide Governance Indicators. Following parliamentary elections in September 2021, the Labour Party candidate Jonas Gahr Støre became the head of a new centre-left coalition minority government, taking over from the previous conservative party-led government, which had been in power since 2013. Scope expects broad continuity in Norway’s main policy areas, in line with the country’s track record of smooth political transitions. Scope evaluates Norway’s ‘institutional and political risk’ profile as strong in its qualitative assessment.

Rating Committee
The main points discussed by the rating committee were: i) domestic economic risk, including growth potential and resilience; ii) public finance risks, including fiscal framework and debt dynamics; iii) external risks; iv) financial stability risks, including housing market and household debt; v) ESG considerations; and vi) peer developments.

Rating driver references
1. Norges Bank, Survey of bank lending, October 2021
2. Ministry of Finance, The lending regulation, October 2021
3. Norway FSA, Consultation response on new lending regulation, October 2020
4. IMF, Article IV Norway Mission, April 2021
5. Norges Bank, Financial Stability Report 2020, November 2020
6. Norges Bank, Monetary Policy Report 3/21, September 2021

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings’ 8 October 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    YES
With access to internal documents                                   NO
With access to management                                            YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 8 February 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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