Fitch Affirms Norway at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Norway's Long-term foreign and local currency IDRs at 'AAA' with a Stable Outlook. The issue ratings on Norway's senior unsecured bonds are also affirmed at 'AAA'. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign-currency IDR at 'F1+'.
KEY RATING DRIVERS
Norway's ratings reflect the strength of the sovereign balance sheet, a very high income per capita, strong human development and governance indicators, and a robust macroeconomic policy framework.
North Sea oil revenues have been prudently managed and invested through a sovereign wealth fund (SWF). Revenues from oil and gas are accrued to the SWF, while the current budget deficit is financed by a transfer from the SWF. The fiscal framework allows the budget to weather the fall in oil prices, and gives the authorities flexibility to implement counter-cyclical policies if needed. At mid-2015, the market value of the SWF was NOK6,897bn (around USD850bn), around 2.7x the size of the non-oil economy.
The budget proposed for 2016 envisages a structural non-oil deficit of NOK194bn, which the Ministry of Finance estimates at 2.8% of the market value of the SWF. This would be well within the limits of the fiscal rule, which indicates that the non-oil deficit should on average equal the assumed real return of SWF investments, which is 4%. The budget proposal includes tax cuts worth around NOK9bn (around 0.3% of GDP). We expect the general government to run an overall surplus of 5.5% of GDP in 2016.
Low oil prices and lower investment in the oil sector are translating into slower growth in the broader Norwegian economy. In 1H15, mainland real GDP (excluding oil and gas extraction and shipping) was 1.4% higher yoy - indicating a substantial slowdown from the 2.2% growth rate for 2014 as a whole. Fitch expects mainland GDP growth of 1.3% this year, and 1.6% next year. Growth is then expected to pick up in 2017 to 2.2%. Unemployment has picked up in recent months in response to the slowdown in economic growth. We expect unemployment to average 4.4% over 2016-2017.
The exchange rate and the policy response by the authorities are offsetting the impact from lower oil prices. The effective trade-weighted exchange rate has depreciated by around 15.5% since the middle of last year. The weaker exchange rate and slower wage growth are improving Norwegian companies' competitiveness. Unit labour costs weighted by trading partners' currencies have fallen - albeit from a high level - by 11.4% between 1Q13 and 2Q15. The Norwegian central bank has loosened monetary policy further, cutting interest rates to 0.75%.
Norway's external position will remain strong, even with lower oil prices. We expect the current account surplus to be 8.6% of GDP this year, before edging up to 9.3% by 2017.
Loose monetary policy and low interest rates could spur house price inflation and a further build-up in household indebtedness, but recent macro-prudential regulations aim to dampen this impact. Household debt is currently more than 2x disposable income. Despite some slowdown in the regions more affected by low oil prices, house prices in 3Q15 were still 6% higher than a year earlier, and the house price-to-income ratio is around 20 percentage points above its long-run average. The Ministry of Finance has recently adopted regulations limiting loan-to-value (LTV) ratios and imposing amortisation on mortgages above a LTV of 70%.
Fitch judges Norway's credit profile as solid, implying that a negative rating action in the near term is unlikely. However, the following factors could, individually or collectively, put downward pressure on the ratings:
-Risks to financial stability, for example, emerging from excessive credit growth or household indebtedness
-An even sharper and sustained fall in oil prices, leading to a rapid erosion of Norway's sovereign and external balance sheet strengths over the medium-term
Fitch assumes as the basis for its current projections that Brent oil prices will average USD60p/b in 2016 and USD70p/b in 2017.
Fitch assumes that the Norwegian government will continue to adhere to the fiscal policy rule in its current form.
Over the medium-term, Fitch assumes that Norway will implement policy measures to address the impact of weakening demographics on long-term fiscal sustainability.