Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable

  • We expect Norway's rebounding petroleum sector and strong labor market will underpin investments and private consumption, allowing for pronounced economic upturn, with above-trend GDP growth of about 2.5% in 2019-2020.
  • Norway continues to benefit from a prosperous economy, strong fiscal and external positions, and a stable policy environment.
  • We are therefore affirming our 'AAA/A-1+' ratings on Norway.
  • The outlook is stable.
On March 22, 2018, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' 
short-term sovereign credit ratings on Norway. The outlook is stable.

The stable outlook reflects our expectation that Norway's credit metrics will 
remain very strong over our 2019-2022 forecast period, enabling the country to 
withstand the negative effect of potential oil price shocks, possible 
escalation of global trade tensions, or a severe housing market correction. 
However, if any of these scenarios were to materialize, we believe there are 
adequate buffers on both the government's and the country's external balance 
sheets to absorb losses.

In light of Norway's strong credit fundamentals, our 'AAA' rating would come 
under pressure only if we observed rapid erosion of the country's currently 
robust external and fiscal balance sheets, combined with a significant 
weakening of institutions and governance standards. We currently consider such 
adverse developments unlikely, however.

The ratings reflect our view of Norway's stable and predictable policymaking 
environment, underpinned by high prosperity, and large external and fiscal net 
asset positions from accumulated petroleum revenues. We estimate Norway's GDP 
per capita at $82,000 in 2018, which is among the highest of all sovereigns we 
rate. Norway has a history of prudent policymaking, reflected in its fiscal 
rule and the creation and management of its sovereign wealth fund, the 
Government Pension Fund Global (GPFG), set up to gradually channel oil 
revenues into the economy in line with the fund's expected real return of 
about 3%.

Institutional and Economic Profile: Economy set to boom in 2019-2020 while the 
petroleum sector rebounds
  • We expect economic growth will accelerate as a strong labor market underpins domestic demand and petroleum production and investments pick up, following efficiency improvements and initiation of key large-scale off-shore projects.
  • Despite continuing imbalances due to Norway's still-high household debt, we believe the currently more balanced housing market and hands-on attitude of the financial regulator limits the risk of a property market crisis.
  • The government has widened its coalition to achieve a majority, suggesting reform will be easier going forward after a first year characterized by controversy, including two cabinet reshuffles.
We expect Norway's economic growth will accelerate in 2019, with mainland GDP 
increasing by about 2.5%, comfortably above the trend growth level. We 
forecast the boom will be broad based, but with strong contribution from 
investments, in particular related to the petroleum sector, which is set to 
rebound strongly in 2019 with several key projects coming on stream. In 
particular, we observe that the break-even Brent price for oil extraction on 
the Norwegian Continental Shelf has fallen significantly in recent years due 
to efficiency improvements and the weak Norwegian krone (NOK), which is a key 
factor behind our assumption of increasing petroleum investments in 2019-2020. 
In addition, planned large-scale projects add to the heightened investment 
level. In our view, this increased investment level will have a positive 
effect on supporting industries and increase activity in surrounding sectors. 

Contributing to Norway's strong credit fundamentals, private consumption is 
set to remain solid on the back of rising wages and a strong labor market. We 
believe that the higher employment levels in 2018 will increase the current 
economic upturn's momentum by fueling domestic demand and driving investments 
in mainland industries. Moreover, housing investments, which dropped 
significantly in tandem with the sharp decline in the housing market in 2017, 
appear to have bottomed out in 2018, indicating that housing starts are 
rising. With production in the oil industry picking up, we forecast the 
petroleum industry will contribute to the mainland growth figures in 2020 and 
beyond, with the country's real growth overall largely on par with mainland 
growth in 2019. 

We observe that, in spite of rebounding oil prices and steady economic growth, 
the krone remained, by historical standards, weak over 2018, to the benefit of 
the competitiveness of mainland exports. We forecast that over the coming two 
years, the krone will gradually appreciate from its current position, 
suggesting that some of the recent competitiveness gains, part of which were 
currency related, will erode, making productivity key to sustaining the 
mainland's export market shares. Moreover, the tightening labor market is set 
to produce higher wage growth over the coming years, which underpins strong 
consumption, but at the same time adds to Norway's already high unit labor 

While the current uptick in the petroleum sector has lessened the imminent 
need for rebalancing of the economy toward the non-oil sectors, over time 
Norway will likely aim to structurally reduce its industrial reliance on 
hydrocarbons, and we expect the government will target further reforms to 
support this transition over the medium to long term. 

We observe a more balanced situation in the residential housing market 
compared with the sharp swings over the past two years, thanks to increased 
housing supply and the government's tightening of macroprudential measures. 
Last year, a debt-to-income ceiling of 5x borrowers' pretax earnings was 
introduced, alongside a stricter loan-to-value ratio requirement in the Oslo 
region for the purchase of a second home. The house price recalibration and 
the authorities' response could potentially contain household debt growth. 
Still, we consider that the accumulated imbalance poses risks to the economy. 
Notably, Norwegian household debt to disposable income stood at 225% in 2018, 
one of the highest ratios among countries of the OECD, and it keeps rising. 
However, we believe the fall in house prices over the past year reduces the 
risk of a severe downturn in the medium term. We anticipate that Norway's 
economic growth potential will be underpinned by a rebound in investments and 
strengthening of the petroleum sector, with reduced reliance on credit-fueled 
household consumption.

In January 2019, the tripartite minority government coalition secured the 
addition of the Christian Democratic Party, resulting in the first 
non-socialist majority government in power since 1985. The current majority 
composition implies the potential for a more predictable policy environment 
and we expect the government will continue to focus on tax reduction, 
infrastructure investment, and labor market reforms while in power. That said, 
we note some contentious issues within the government coalition, notably 
regarding immigration and environmental issues, which introduces some 
uncertainty regarding the direction of overall policy proposals and fiscal 
spending plans. That said, we observe a broad cross-party consensus on key 
macroeconomic issues, such as the fiscal spending rule and regarding Norway's 
economic position and vast fiscal buffers as important cushions against 
possible fiscal slippages. 

Flexibility and Performance Profile: Sizable fiscal and external buffers 
underpin superior financial flexibility
  • Norway's extremely strong external balance sheet generates sizable income that anchors its robust current account surplus, which we expect will be bolstered by rebounding oil production.
  • With the expected pick up in petroleum sector activity, the net tax revenues from oil will increase over the coming years resulting in net inflows into the petroleum fund.
  • Cumulative returns have surpassed cumulative inflows, with the GPFG's market value exceeding $1 trillion.
The GPFG has grown rapidly since its creation in 1990, and it currently 
underpins Norway's very strong external and fiscal net asset positions. 
Increases to the fund are through inflows of petroleum tax revenues, 
state-owned petroleum activities, and returns on the fund's assets. The fund's 
value stands at above $1 trillion, and now represents more than 250% of 
Norway's mainland economy. In 2017, the fiscal spending allowance was changed 
to 3% of the fund, to match the revised real rate of return estimate, compared 
with 4% previously. This implies a largely neutral fiscal stance, on average, 
from 2018.

Moreover, parliament has decided to gradually increase the proportion of 
equity investments in the fund to 70.0% from 62.5%, which increases the fund's 
exposure to fluctuations in global equity markets. Even though returns are 
strongly positive, a sharp drop in equity markets could erode the fund's 
market value, limiting the government's options to finance fiscal spending. 
Nevertheless, the fiscal spending framework has scope to deviate from the 
fiscal spending rule in any given year or years, thereby allowing the 
government to adjust spending or revenues accordingly. Regarding the fund's 
asset allocation, on March 8, 2019, the center-right government submitted a 
proposal for parliament's consideration to limit the GPFG's exposure to oil 
and gas companies that only conduct exploration and production with the 
intention of reducing the economy's overall dependence on the global petroleum 

Norway's fiscal policy has gradually become more neutral, following the 
introduction of a highly expansive fiscal policy over 2014–2016 to counter the 
negative economic effects of the sharp fall in the oil price. For 2019, we 
observe that the central government has budgeted a structural non-oil deficit 
of NOK232.5 billion (7.5% of mainland GDP), corresponding to 2.7% of the 
GPFG's capital at the beginning of the year, suggesting a neutral fiscal 
position. In contrast to 2016 and 2017, where net transfers from the GPFG to 
the central government budget exceeded inflows to the fund from petroleum 
revenues, in 2019 we expect that increasing production in the petroleum sector 
is likely to reverse this net transfer. We expect the general government 
surplus will average a robust 7% of GDP over 2019-2022, thanks to recurring 
interest and dividend income on the fund's assets. However, we expect the net 
transfer from the petroleum fund into the budget will become the norm over the 
long term, because the net inflow of petroleum revenues is on a structural 

Importantly, although revenues from petroleum activities are set to 
structurally decline, the GPFG's assets generate sizable yearly cashflows from 
dividends and coupon payments. These will provide a material revenue source at 
an expected NOK225.7 billion (7.3% of mainland GDP) for the consolidated 
fiscal budget and underpin Norway's surplus position. Notably, 80% of the 
fund's returns have materialized over the past five years, and cumulative 
returns have surpassed those of cumulative inflows. 

The central government's debt issuance is to finance capital transactions and 
does not reflect its fiscal performance. We expect central government debt 
will average about 20% of GDP over 2019-2022, with the debt of local and 
regional governments adding an additional 15% of GDP to the general government 
debt burden of about 35% of GDP. The share of foreign ownership of central 
government bonds is about 60% and could represent a risk should investor 
sentiment turn negative, although this is not our base-case expectation. The 
government's net asset position remains exceptionally strong at more than 200% 
of GDP, and the interest burden on general government debt is low, averaging 
1.1% of revenues in 2019-2022.

After two years of notable declines, the current account surplus increased 
substantially from a low 4% of GDP in 2016 to 8.1% of GDP in 2018. The current 
account was boosted mainly by solid surplus on the goods trade, supported by 
positive developments in oil and natural gas prices, and improvements in the 
primary income accounts, including stable income from abroad. The GPFG's 
external assets also anchor the country's robust current accounts position. 
With the GPFG's growth, Norway is becoming less reliant on merchandise exports 
to generate foreign currency revenue. This reflects Norway's total net 
international assets of more than NOK7.0 trillion at the end of 2018. We 
expect sound annual current account surpluses through 2022 of about 7.5% of 
GDP, with the surplus bolstered by a combination of a rebound in the trade 
surplus on the back of increasing oil-related exports, and sustained returns 
on Norway's substantial external assets.

With all of the GPFG's assets invested abroad, Norway is in an extremely 
strong net external asset position, at about 445% of current account payments 
for 2018. However, we estimate that Norway's gross external financing needs 
are high, exceeding 170% of current account receipts and usable reserves on 
average through 2022, largely as a result of banks' foreign currency 
borrowings. We assess the krone as an actively traded, floating currency. 
According to the Bank for International Settlements' Triennial Central Bank 
Survey 2016, the krone is bought or sold in 1.7% of global foreign exchange 

Norges Bank operates with an inflation-targeting regime, and has established a 
track record of operational independence and clear policy objectives. It has 
an array of monetary instruments at its disposal, which, in conjunction with 
developed capital markets, enables effective policy transmission. In March 
2018, its mandate was revised after the government reduced the inflation 
target to 2.0% from 2.5%. As oil-sector revenues abate, some market 
participants argue that Norway's inflation target should move in line with 
that of comparable countries. However, we do not expect the revised mandate 
will result in significant changes in monetary policy.

The krone has stabilized alongside the settling of oil prices, but remains 
weak by historical standards, which will sustain exports through 2019. We 
expect wage growth will pick up in 2019, since market surveys indicate 
tightening labor capacity. We expect these factors will fuel inflation. On 
March 21, Norges Bank followed through on its communicated rate hike and 
increased the policy rate by 25 bps to 1.0%. We expect the bank will continue 
its tightening cycle over the remainder of 2019 and 2020, which will support a 
gradual strengthening of the krone and limit inflation to about 2% over our 
forecast horizon.

We observe that Norway's banking sector has been relying on international 
capital markets to fund a significant part of its credit growth. Including 
foreign deposits, the banking sector is in a net external debtor position 
(domestic core deposits cover about 35% of systemwide loans). Norway's high 
regulatory capital standards and banks being ahead of schedule with 
implementing Basel III liquidity requirements helps to mitigate concerns about 
the sector's external position. Additionally, about 40% of banks' external 
funding comes from foreign parent banks, such as Nordea Bank, Danske Bank, and 
others. Adjusted for this contribution, we estimate that the Norwegian banking 
sector's share of net external debt financing is closer to 15%-20% of 
systemwide loans. The EU Recovery and Resolution Directive was implemented 
into national law in Norway in 2018 and came into force on Jan. 1, 2019. We 
have recognized this development by adjusting our view of the likelihood of 
government support for the banking sector to uncertain from supportive. We 
consider the prospective resolution framework sufficiently effective to allow 
for uplift for banks that we expect to build substantial additional 
loss-absorbing buffers in line with the minimum requirement for eligible 
liabilities framework, which we expect will most likely be put in place this 

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