Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Norway’s long-term issuer and senior unsecured debt ratings at AAA in both local and foreign currency and maintained the Stable Outlook. The short-term issuer rating has been affirmed at S-1+ in both local and foreign currency with Stable Outlook.

The affirmation of Norway’s credit ratings reflects the country’s economic resilience and expected continued general government fiscal surpluses over coming years. Norway has one of the world’s highest per capita income levels and benefits from low central government debt, issued only to finance capital expenditure. The significant net public asset position, driven by savings accumulated through its sovereign wealth fund, the Government Pension Fund Global (GPFG) is an additional significant credit strength. Moreover, strong fiscal, monetary and financial governance institutions further support the ratings. The main credit challenges relate to: i) high household debt and imbalances in the real estate sector; and ii) the long-run transition to a non-commodity-dependent economy.

For the updated rating report, click here.

Key rating drivers

Economic resilience and favourable growth outlook. Economic output in Norway has proven resilient during recent crises. Mainland GDP remains above its long-term trend and was 5.4% above pre-pandemic levels in Q1 2024, broadly in line with other highly-rated peers such as Sweden (+4.8%), the Netherlands (+6.5%) and Switzerland (+6.5%). Still, high inflation, falling real wages and high interest rates dampened investment in housing and consumer spending during 2023. As these pressures gradually ease, Scope expects economic output to accelerate during the second half of 2024. The outlook is supported by an overall resilient labour market with still elevated vacancies and the employment rate remaining above pre-pandemic levels at 69.7% as of June 2024, though the unemployment rate has increased somewhat and is expected to reach 4.1% in 2024, up from 3.2% in 2022, but in line with pre-pandemic levels. Inflation has eased from its peak of 7.4% in October 2022 but remains above the 2% target at 2.8% in July 2024. While tight financing conditions continue to weigh on private demand, rising real wages should support stronger consumption. Scope expects GDP growth of 1.2% in 2024 and 2.0% in 2025 before converging towards Norway’s growth potential of around 1.8%.

Strong public finances, supported by GPFG. Under Norway’s fiscal framework, revenues from the petroleum sector are saved in the GPFG, and the non-oil budget deficit is set to 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 Covid-19 pandemic. According to estimates in the revised 2024 budget, the structural non-oil fiscal deficit will increase to NOK 418.7 in 2024 (10.4% of mainland GDP), up from NOK 384.9bn in 2023, but decline as a share of the GPFG to 2.7% in 2024 from 3.0% in 2023¹. Overall headline fiscal balances including the oil sector are expected to remain above 10% of GDP over the next five years. As a result, Scope expects the debt-to-GDP ratio to decline from 41.8% in 2023 to 30.3% by 2029.

Large net public asset position driven by savings accumulated through the sovereign wealth fund. Norway benefits from a significant net public asset position as a result of savings accumulated through the GPFG over the past decades. Net financial assets reached a new high of 398% of GDP in Q1 2024, marking by far the highest net asset ratio among AAA-rated peers. Since its launch in 1990, the GPFG has grown to about USD 1.7trn or around 475% of 2023 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 no more than 3% of GPFG assets, is a significant credit strength. The continued increase in the fund’s market value during H1 2024 was driven by a strong return on investments (NOK 1,478bn), oil revenue transfers from the government (NOK 188bn) and a weaker krone (NOK 315bn)². 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.

Rating challenges: high household debt and imbalances in the real estate sector, and challenges concerning the long-run transition to a non-commodity-dependent economy.

Elevated household debt and exposure to commercial real estate (CRE) firms are longstanding vulnerabilities of the Norwegian financial system. Due to the small size of the government bond market in Norway, banks rely heavily on covered bonds, largely secured against residential mortgages, which make up more than half of Norwegian banks’ liquidity reserves³. Despite the sharp rise in interest rates, house prices have continued to increase during the first half of 2024, reaching a new peak in July 2024 and being 23% above pre-Covid levels. Residential investment is set to increase over the next year driven by falling interest rates and rising home prices. Real estate sector risks are intertwined with high levels of household debt, mostly consisting of mortgage loans. The household debt ratio has decreased slightly in recent years from an all-time high of 239% of disposable income in Q3 2021 to 231% in Q2 2024. Still, rising interest rates and the high share of Norwegian households with floating rate mortgages have pushed the interest burden from 4.0% of disposable income to 9.3% over the same period, its highest level since 2008. High debt levels also contributed to a sharp rise in the debt service ratio (i.e. the share of income used to service debt) for Norwegian households up from around 15% in 2021 to just over 20% by end-2023, well above other highly-rated peers such as Sweden (13.1%), Denmark (12.7%) or the Netherlands (12.1%). This increase coincided with government efforts to address high private sector debt by extending the lending regulation, which includes required principal payments to consumer loans with collateral other than real estate⁴. Households remain vulnerable to a sustained period of high interest rates or an economic downturn with rising unemployment.

Banks’ high exposure to commercial real estate is another important vulnerability. CRE exposures are high at all large banks, accounting for around half of total corporate lending⁵. 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. To date, banking sector resilience is supported by solid profitability, comfortable capital buffers that provide resilience to severe stress scenarios, a systemic risk buffer set at 4.5% and a 2.5% countercyclical risk buffer set at one of the highest rates in Europe.

Finally, 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 strengthened energy cooperation with Norway. As one of the main alternative energy suppliers to Russia, Norway’s share of gas imports to the EU increased from 24% in 2021 to 30% in 2023⁶. 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.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks Norway faces over the next 12 to 18 months are well balanced.

Downside scenarios for the rating and Outlooks are if (individually or collectively):

1. Macroeconomic policy weakened significantly, threatening Norway’s long-run net public and external asset positions; and/or
    
2. A financial crisis, potentially exacerbated by domestic imbalances, materially damaged Norway’s public sector and financial system balance sheets.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘aaa’ for Norway. Under Scope’s methodology, this initial indicative rating receives: i) no further adjustment from the methodological reserve-currency adjustment; and ii) no negative adjustment from the methodological political-risk quantitative adjustment. On such a basis, a final SQM quantitative rating of ‘aaa’ is assigned for Norway and reviewed by the Qualitative Scorecard (QS) where this rating can be adjusted by up to three notches up or down depending on the significance of Norway’s qualitative credit strengths or weaknesses compared against an SQM-assigned peer group of sovereigns.

Scope identified the following relative credit strengths of Norway via the QS: i) monetary policy framework; ii) fiscal policy framework; iii) long-term debt trajectory; 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. On aggregate, the QS generates a two-notch positive adjustment for Norway’s credit rating, concluding in final AAA long-term issuer ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Environmental factors are explicitly considered in the rating process via the environment sub-category under the ESG risk pillar. Norway receives high scores in the SQM indicators measuring CO2 emissions per GDP, the exposure and vulnerability to natural disaster risks, and the ecological footprint of consumption compared with available biocapacity. In line with other advanced economies, the country receives a low score for the SQM indicator measuring greenhouse gas (GHG) emissions per capita. Norway aims to reach climate neutrality by 2050, when the sovereign’s wealth fund should also have a net zero emissions portfolio. Carbon taxes are set to increase over coming years and amounted to around EUR 99 as of April 2024⁷, below other highly rated sovereigns such as Switzerland (EUR 123) and Sweden (EUR 118), but well above Denmark (EUR 26), Germany (EUR 45) and the Netherlands (EUR 67). Scope assesses Norway’s QS adjustment for ‘environmental factors’ as ‘neutral’ given the significant medium-term transition risks towards a non-commodity-dependent economy. The Norwegian Offshore Directorate expects a decline in total petroleum production over the coming decades, though the pace of decline heavily depends on exploration activity and technological development⁸. Under a base scenario, net cash flows from Norwegian petroleum activities from 2025 until 2050 would amount to around NOK 9tn (233% of 2023 mainland GDP). Alternative scenarios range from around NOK 3tn (78% of GDP) in a low-price-low-production scenario entailing a complete dismantling of the petroleum industry, to NOK 18tn (467% of GDP) in a high-price-high-production scenario.

Factors related to Norway’s social profile are captured in Scope’s SQM, where the country benefits from its high labour force participation and achieves the highest score among highly-rated peers for its low income inequality. As most developed economies, Norway faces an ageing population and a high old-age dependency ratio, although long-run demographic trends remain a relative credit strength when compared with peers such as Germany, the Netherlands, Denmark or Sweden. The country ranked second after Switzerland in the United Nation’s 2022 Human Development Index⁹ – 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 its ‘aaa’ sovereign peer group.

Governance-related factors are explicitly captured in Scope’s assessment of a composite index of five 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 the current centre-left coalition minority government. Scope evaluates Norway’s ’governance’ profile as ‘strong’ in its qualitative assessment, reflecting the historical consensus-driven political system and a tradition of minority governments. Scope expects broad continuity in Norway’s main policy areas, including the management of petroleum revenues. The next parliamentary elections are scheduled for September 2025.

Rating committee
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. Ministry of Finance, Key figures in the Revised National Budget 2024 
2. Norges Bank, Government Pension Fund Global, Half-year report 2024 
3. Norges Bank, Financial Stability Report 2024H1, May 2024 
4. Ministry of Finance, The lending regulation, December 2023 
5. Norges Bank, Advice on the systemic risk buffer, May 2024 
6. European Council, Where does the EU’s gas come from? 
7. Tax Foundation, Carbon Taxes in Europe, June 2024 
8. Norwegian Offshore Directorate, Resource Report 2024
9. United Nations, Human Development Index 

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), 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: 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
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, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 18 August 2017. The Credit Ratings/Outlooks were last updated on 29 September 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis 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 does not, 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 other 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 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.