Scope affirms Norway’s AAA rating with Stable Outlook
For the updated rating report accompanying this review, click here.
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 continued overall 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 central government 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 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 are balanced over the next 12 to 18 months.
The ratings/Outlooks could be downgraded if, individually or collectively: i) a significant weakening in macroeconomic policy threatened Norway’s long-run net public and external asset positions; and/or ii) a financial crisis, potentially exacerbated by domestic imbalances, materially damaged Norway’s public sector and financial system balance sheets.
The first driver supporting Norway’s AAA ratings is the country’s economic resilience, demonstrated during the pandemic and the subsequent energy crisis in Europe and associated cost-of-living pressures. Real GDP grew by 3.3% in 2022, after 3.9% in 2021, on the back of strong consumption boosted by high households’ savings and a buoyant labour market, as well as robust business investment and exports. However, inflationary pressures driven by high energy and food prices, as well as increasing interest rates have started to lower households’ purchasing power and private investments since end-2022. Scope expects GDP growth to slow to 1.2% in 2023 as falling real wages and high interest rates lead to weaker household consumption and housing investments. However, sustained petroleum investments and export activity, alongside fiscal support for households will cushion the economic slowdown. Growth is expected to remain muted in 2024 with GDP increasing by 0.8% before converging towards Norway’s growth potential of around 1.8%.
The Norwegian labour market remains very tight, with employment levels near all-time highs of 70.1% in July, reflecting an increased participation of foreign and temporary workers in the labour force. Job vacancies have fallen slightly over the summer from all-time highs in Q1 2023, while the unemployment rate stood at 3.5% in Q2 2023, below the peak of 5.4% reached in Q3 2020. Scope expects the unemployment rate to increase slightly from 3.4% in 2023 to 3.7% in 2024 amid the economic slowdown.
CPI inflation fell significantly in 2023 decreasing from 7.1% in January to 4.8% in August on the back of easing energy and consumer goods prices. Core inflation (measured as CPI excluding taxes and energy) remained broadly unchanged over the same period, at 6.3% in August 2023, reflecting continued high services inflation. The most important inflation drivers over the coming months will be the weakening NOK, a tight labour market and high wage growth which stood at 5.1% in the year to Q2 2023. Scope expects core inflation to gradually ease, but it is likely to remain above 2% for most of 2024. Norges Bank raised its policy rate by 25bp to 4.25% at its September meeting and signalled that a somewhat higher policy rate is needed to bring inflation back to target. While the higher policy rate has started to moderate credit growth, strong disposable income and still elevated pandemic savings have supported continued economic growth so far. Scope expects the policy rate to reach 4.50% by end-2023.
As a major energy exporter, Norway has benefitted from the strong increase in oil and gas prices in Europe, which resulted in significant additional state revenues in 2022. This was also reflected in buoyant petroleum and gas exports and a record-high current account surplus of 30.4% of GDP in 2022. Net cash flow from operations rose from NOK 288bn in 2021 (8.6% of mainland GDP) to NOK 1,285bn in 2022 (38.9% of mainland GDP). Due to the expected lower prices of petroleum products, net cash flows are estimated to decrease to NOK 1,016bn in 2023, although remaining near historically high levels.
Under Norway’s fiscal framework, revenues from the petroleum sector are saved in the GPFG, and the non-oil budget deficit shall over time correspond to the long-term real return on the GPFG, which is estimated at 3%. Since the inception of Norway’s sovereign wealth fund in 1990, transfers from the fund to the central government budget have only exceeded net petroleum revenues on two occasions – in 2016/17 during a slump in oil prices and in 2020/21 due to the increased spending needed to respond to the pandemic. According to the 2023 revised budget1, the structural non-oil fiscal deficit amounted to NOK 357.3bn (2.7% of GPFG assets) in 2022 and is expected to increase from the originally planned NOK 316.8bn to NOK 372.6bn in 2023, reaching the threshold of 3.0% of GPFG assets. Additional expenses aim to compensate for higher inflation domestically, as well as provide support for Ukraine and developing countries severely impacted by the war. The increased public expenditure is estimated to have a positive fiscal impulse of around 0.4pp of GDP which could result in further monetary tightening.
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 GPFG. The country holds substantial net financial assets amounting to 375% of GDP at Q2 2023. These 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 among AAA-rated peers.
Since its launch in 1990, the GPFG has grown to about USD 1.4trn or around 430% of 2022 mainland GDP. Fund assets are invested abroad, and the divestment of oil and gas shares in recent years has helped diversify the country’s wealth away from the sector. The prudent investment of Norway’s oil and gas wealth, combined with the fiscal rule targeting annual transfers to the budget of 3% of GPFG assets, is a significant credit strength. A strong performance of equity markets and a weaker krone led to a 23% increase in the fund value, from NOK 12,429bn at the end of 2022 to NOK 15,299bn as of H1 2023. However, the increase in USD terms was smaller at 13% compared with 2022 and up 2% compared with the previous peak in 2021. 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 investments to benefit future generations.
Despite these credit strengths, Norway’s ratings face several medium-term credit challenges.
First, elevated household debt and exposure to commercial real estate (CRE) firms are longstanding vulnerabilities of the Norwegian financial system. Despite the sharp rise in interest rates, real estate prices have remained near their peak from August 2022 and stand 17% above pre-Covid levels as of August 2023. Higher borrowing costs and an increase in the stock of unsold houses are likely to lead to a decline in house prices over the next months. Nevertheless, high demand, new regulations on the sale of real estate property introduced in January and limited supply should help contain a sharp price correction. To support resilience of the banking sector, the Monetary Policy and Financial Stability Committee decided in August to maintain the countercyclical capital buffer rate at 2.5%.
Real estate sector risks are intertwined with high levels of household debt, mostly consisting of mortgage loans. While the household debt ratio has been stable over the past four years, being near all-time highs of 238% of disposable income in Q2 2023, the interest burden stood at 8.4%, its highest level since 2008. This risk is compounded by Norwegian households’ high percentage of mortgages with floating interest rates. Given the already sharp rise in interest rates, the Ministry of Finance introduced amendments to the lending regulation2 under which borrowers have to withstand further interest rate increases of at least 3pp instead of 5pp previously. A deeper market correction represents a significant economic vulnerability that could adversely impact both the economy and financial stability.
Banks’ high exposure to commercial real estate is another important vulnerability3. CRE exposures are high at all large banks, accounting for around 50% of total corporate lending. CRE companies tend to have higher leverage compared to other firms and higher refinancing risks from the short maturities of new commercial property mortgages. Losses in this sector could therefore result in material negative impacts on banks’ balance sheets and cause substantial downturns in the financial market. Nevertheless, Norwegian banks’ loans to CRE companies with elevated refinancing risks account for about 10% of their total CRE exposures and only a third of this is to firms with weak financials.
In addition, Scope notes that the Norwegian banking sector proved resilient during the Covid-19 crisis and continues to show ample capacity to absorb losses thanks to strong levels of capitalisation, liquidity and profitability. As of Q1 2023, the average CET1 ratio stood at 18.1%, well above the minimum requirements and the EU average of 15.7%. Meanwhile, the liquidity coverage ratio stood at 151% and the NPL ratio remained stable at around 1%. Norwegian banks’ profitability has benefitted from increased net interest income boosted by high interest rates and a release of credit provisions after lower-than-expected realised losses during the pandemic crisis. Overall, Scope expects banks’ losses related to household debt to be moderate given the generous unemployment benefits and sufficient liquid asset buffers held by households.
Second, Norway remains highly reliant on the oil and gas sector, exposing it to long-term transition challenges such as stranded asset risks as its main trading partners gradually transition away from fossil fuels. However, the decision to continue oil exploration is strongly supported by EU member states, which have recently strengthened energy cooperation with Norway as it is seen as one of the main alternative gas suppliers to Russia. Norway accounted for around 25% of EU gas imports in 20224, which is set to increase, and will thus continue to play a key role as an energy supplier to EU member states.
The Norwegian government has prudently prioritised restructuring the national economy with the aim of reaching climate neutrality by 2050 and further diversify economic activity. The decision to divest companies solely dedicated to oil and gas exploration and production from the GPFG’s benchmark index also helps diversify the country’s wealth away from the sector. The government aims to double climate finance from NOK 7bn in 2020 to NOK 14bn by 2026 and to reach carbon neutrality by 2050, when also the sovereign’s wealth fund should have a net zero emissions portfolio. The 2023 budget included a proposal to allocate additional funds to the Green Platform Initiative over 2023-25, supporting research and innovation projects that contribute to the green transition. In addition, Norway’s Climate Action Plan 2021-305 proposes raising the carbon tax from NOK 590 per tonne of CO2 in 2021 (around EUR 60) to NOK 2,000 (around EUR 200) per tonne of CO2 in 2030. Several other measures, including subsidies for electric cars and investments in renewable energy, should also support the 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. The qualitative scorecard (QS) can adjust this indicative rating by up to three notches depending on the size of relative qualitative credit strengths or weaknesses versus 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 governance risks. No relative credit weaknesses were identified.
The combined relative credit weaknesses and strengths identified in the QS generate a two-notch positive adjustment to the ratings and indicate a sovereign credit 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 25% weighting under the quantitative model (CVS) and 20% weighting in the qualitative scorecard (QS).
Norway’s performance on ESG factors supports the country’s AAA sovereign rating. With respect to environmental factors, Norway receives high scores for the following CVS indicators: carbon emissions per unit of GDP, exposure and vulnerability to natural disaster risks and the ecological footprint of consumption compared with available biocapacity, while it receives a low score for GHG emissions per capita. Scope assesses Norway’s QS adjustment for ‘environmental factors’ 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 the 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 second after Switzerland in the United Nation’s 2021 Human Development Index – an indicator predicated on life expectancies, educational achievement and income levels. Scope’s QS assessment of Norway’s ‘social factors’ 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 a composite index of six World Bank Worldwide Governance Indicators where Norway has the highest score in Scope’s rated sovereign universe. Following parliamentary elections in September 2021, 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. Next parliamentary elections are scheduled for September 2025. Scope evaluates Norway’s ’governance’ profile as ‘strong’ in its qualitative assessment.
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finances risk, including fiscal framework and debt dynamics; iii) external risks; iv) financial stability risks, including housing market and private sector debt; v) ESG considerations; and vi) peer developments.
Rating driver references
1. The Revised National Budget 2023, May 2023
2. Ministry of Finance: Amendments to the lending regulation, December 2022
3. Norges Bank: Financial Stability Report 2023 H1
4. European Council: Where does the EU’s gas come from?
5. Ministry of Climate and Environment: Norway’s Climate Action Plan for 2021-2030
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 September 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Core Variable Scorecard Model Version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: the Rated Entity, public domain.
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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 21 October 2022.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
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