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

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Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable Research Update: Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable March 12, 2021 Overview PRIMARY CREDIT ANALYST - We expect the Norwegian economy will begin recovering in 2021, with real GDP growth of 3.2% Johanna Melinder in 2021, and averaging 2.5% over 2022-2024, on the back of a rebound in private consumption Stockholm and exports, supported by stronger oil prices. + 46 84 40 5926 johanna.melinder - The government is using its fiscal flexibility and large net asset position to limit COVID-19's @spglobal.com economic impact, and fiscal headroom remains very strong with sizable buffers. SECONDARY CONTACT - We are affirming our 'AAA/A-1+' long- and short-term ratings on Norway. Gabriel Forss - The outlook is stable. Stockholm + 46 84 40 5933 gabriel.forss @spglobal.com Rating Action ADDITIONAL CONTACT EMEA Sovereign and IPF On March 12, 2021, S&P Global Ratings affirmed its 'AAA/A-1+' long- and short-term sovereign SovereignIPF credit ratings on Norway. The outlook is stable. @spglobal.com Outlook The stable outlook reflects our view that Norway has ample headroom to withstand the adverse effects of the pandemic without a significant impact on its credit metrics. Norway has extremely strong fiscal and external net asset positions, which together with high wealth levels, strong institutions, and an effective monetary policy regime, support the rating. Downside scenario Our 'AAA' rating could come under pressure if the country's robust external and fiscal balance sheets eroded rapidly, combined with a significant weakening of institutions and governance standards, or a pronounced rise in geopolitical risk. We currently consider this unlikely, however. www.spglobal.com/ratingsdirect March 12, 2021 1 Research Update: Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable Rationale Norway's policymaking environment is stable and largely predictable, underpinned by high wealth levels, and large external and fiscal net asset positions from over three decades of accumulated petroleum revenue. We estimate the country's GDP per capita at $80,900 in 2021, 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 very large sovereign wealth fund, the Government Pension Fund Global (GPFG), which stands at $1.3 trillion or about 300% of GDP. Institutional and economic profile: Solid petroleum exports and substantial government support limited the pandemic's impact on the economy - We expect the reintroduction of COVID-19-related restrictions will slow near-term recovery, but that pent-up demand will translate into growth of 3.2% in 2021 once restrictions are eased. - Comprehensive government support packages, totaling 16% of GDP in 2020, limited the pandemic's impact on the labor market and overall economy. - Efficient and flexible policymaking, as illustrated by timely decisions and sizable fiscal support during the pandemic, have supported the economy. The Norwegian economy contracted 0.8% in 2020. This is less than most European peers, largely thanks to substantial government support packages and strong net exports, the latter primarily reflecting increases in petroleum exports in the second half of the year. However, due to lower oil prices at the beginning of 2020, the nominal economy took a harder hit and contracted by 4.5%. Although we expect the reintroduction of lockdown measures will weigh on recovery in the near term, the economy should rebound by 3.2% in 2021. We believe household consumption will recover quickly once restriction are eased, since Norwegian households are wealthy and have accumulated pent-up demand, and government support packages have helped limit the longer-term impact on the labor market. At the same time, we forecast Brent oil prices increase will average $60 per barrel (/bbl) in 2021-2022 and $55/bbl in 2023 and beyond (see " S&P Global Ratings Revises Oil And AECO Natural Gas Price Assumptions And Introduces Dutch Title Transfer Facility Assumption ," published March 8, 2021, on RatingsDirect). This, together with a more prominent resumption of global trade, will support Norwegian exports. For 2022-2024, we expect growth will average 2.5% annually, supported by still-solid private consumption and increased oil and gas exports and investments, as production for the Johan Castberg field comes on stream (planned production of about 170,000 barrels per day) and new development continues. New development will be supported by temporary changes to the Petroleum Tax Act lasting through 2022, which will encourage new petroleum investments toward the end of our forecast horizon. Higher oil prices in the medium term will support the oil sector. However, we see risk that it could hamper economic diversification beyond the sector. A stronger Norwegian krone as a result of higher oil price would weigh on Norwegian competitiveness outside the sector, while a more profitable petroleum sector decreases incentives to expand into other sectors. That said, we note that Norway is advanced in other sectors, such as engineering and maritime industries, and beyond the pandemic we expect public policy to further focus on diversifying the economy. With regards to the fishing industry, Norway's second-largest export, ongoing discussion with the EU and the U.K. following Brexit on quotas creates some uncertainty, but we expect agreements to be such that no material impact on the sector is observed in the medium term. www.spglobal.com/ratingsdirect March 12, 2021 2 Research Update: Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable Norway acted quickly to curb the spread of COVID-19 and has now reintroduced restrictions to control the increasing spread of the virus. In comparison to most peers, Norway has experienced a significantly lower rate of infections among its population. As of end-February, Norway had about 190 deaths per million people, while Sweden had more than 1,200 and Denmark about 400. Vaccination is progressing broadly in line with plans, but similar to European peers the pace is relatively slow. The government introduced large financial packages to support the economy, including reforms to support businesses and individuals hurt by the pandemic and falling oil prices. Fiscal spending includes various measures to help ease the economic impact of the lockdown measures and help employment recover swiftly. We estimate that total support packages amount to about Norwegian krone (NOK) 560 billion, or 16% of 2020 GDP, of which NOK200 billion constitutes fiscal spending. Although these programs are not yet fully utilized, many have been extended beyond the second lockdown. Moreover, we do not exclude the possibility of additional extensions or support should restrictions remain in place longer than currently expected. In early 2020, the Progress party left the ruling coalition, leaving the government in a minority position. Despite this, the government has been able to take decisive action to handle the pandemic, although we note that there have been recent instances where the opposition has overruled the government, for example to increase the size of support packages. However, there is broad cross-party consensus on key macroeconomic issues, such as the fiscal spending rule and regarding the country's economic position; and very large fiscal buffers act as important cushions against possible fiscal slippages. Norwegian household debt to disposable income, at above 230% in 2020, is among the highest of the Organization for Economic Cooperation and Development countries, and we expect it will increase further over the next two years on the back of increasing house prices. We believe that the accumulated imbalances could pose an economic risk. However, we expect that house price growth will slow in 2021 compared with 2020, as pandemic-related demand for more space will abate throughout 2021. Financing costs are unlikely to decrease much further, and the reinstatement of the macroprudential measures will contain excessive lending demand, in our view. We consider financial supervision in Norway strong, and expect authorities to implement further macroprudential policies if needed, while we observe that banks have reduced their related risk exposure in recent years. Flexibility and performance profile: The country's net external asset position is among the highest of all rated sovereigns - We expect Norway's current account surplus will recover in 2021, as the trade balance is supported by an increase in oil prices and recovery in global trade. - The drop in oil revenue and increased fiscal spending will continue to result in net transfers from the GPFG to support the central government budget. - With the market value of the GPFG at close to $1.3 trillion, the country benefits from large buffers to navigate periods of market distress. Norway's very strong external and fiscal net position is underpinned by the large GPFG. Returns on the fund's large asset base are now the main source of the fund's growth; inflows of petroleum tax revenue and state-owned petroleum activities contribute to a lesser degree. The GPFG's value stands at close to $1.3 trillion, and represents more than 300% of the country's GDP, generating sizable yearly cash flows from dividends and coupon payments. In our view, Norway is in a strong www.spglobal.com/ratingsdirect March 12, 2021 3 Research Update: Norway 'AAA/A-1+' Ratings Affirmed; Outlook Stable position to navigate periods of market distress with its large buffers and fiscal position. According to the fiscal framework, withdrawals from the GPFG transferred to the central government budget should over time be equal to the fund's expected return (3% of the fund's value). However, higher transfers are permitted during economic downturns--as during the pandemic. We estimate that higher fiscal spending in 2020 led to a non-oil deficit of about 12% of GDP, which together with lower hydrocarbon revenue, due to the fall in oil prices, resulted in net withdrawal from the fund of about NOK70 billion, or 2% of GDP, in 2020.
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