SOVEREIGN AND SUPRANATIONAL
ISSUER IN-DEPTH Government of Norway - Aaa stable 6 July 2021 Annual credit analysis
OVERVIEW AND OUTLOOK The credit profile of Norway reflects its large fiscal and external buffers, very strong RATINGS institutions, prudent and effective macroeconomic and fiscal framework, high per-capita Norway wealth, labour market flexibility and strong competitiveness. In addition, the rating reflects Foreign Local Currency Currency Norway's economic resilience, which allowed its credit profile to withstand the challenges Gov. Bond Rating Aaa/STA Aaa/STA arising from the coronavirus pandemic, limiting long term scarring, as the government's Country Ceiling Aaa Aaa strong balance sheet allowed for a significant fiscal response to buffer the shock.
TABLE OF CONTENTS The rating also reflects the government's prudent planning for when Norway's hydrocarbon OVERVIEW AND OUTLOOK 1 resources are depleted. Norway has long segregated the domestic economy as much as CREDIT PROFILE 2 possible from volatility in oil revenue by using several tools. Most importantly, it places oil Economic strength score: a1 2 and gas income into a sovereign wealth fund, the Government Pension Fund Global (GPFG), Institutions and governance strength score: aaa 9 which is invested entirely abroad, and has a flexible exchange rate. Fiscal strength score: aaa 13 Credit challenges posed by Norway's demographics and the hydrocarbon sector's lower Susceptibility to event risk score: a 18 contribution to growth and the government's finances over the longer term are manageable. ESG considerations 24 Still, the likelihood of oil prices staying lower for longer means future net transfers to the Scorecard-indicated outcome 25 Comparatives 26 GPFG will be smaller than in the past, such that most growth in the GPFG's value will derive DATA, CHARTS AND REFERENCES 28 from reinvested earnings. The stable outlook on the rating is supported by the resilience of Norway's credit metrics Analyst Contacts to the coronavirus and oil price shocks, as large fiscal buffers and strong institutions have allowed for an effective fiscal response to cushion the impact. At the same time, we expect Daniela Re Fraschini +44.20.7772.1063 Vice President - Senior Analyst the authorities to manage the challenges posed by vulnerabilities in the property market in a [email protected] way that will preserve Norway’s very high creditworthiness.
Sean Kou +49.69.70730.938 Downward pressure on the stable outlook and eventually the rating could arise if the prudent Associate Analyst [email protected] macroeconomic and fiscal framework that sustains Norway's strong credit profile weakens significantly, leading to a material and enduring erosion in the country's accumulated fiscal Dietmar Hornung +49.69.70730.790 Associate Managing Director buffers, with a lasting negative impact on its economic and fiscal strength. [email protected] This credit analysis elaborates on Norway’s credit profile in terms of economic strength, Alejandro Olivo +1.212.553.3837 Managing Director institutions and governance strength, fiscal strength and susceptibility to event risk, the four [email protected] main analytic factors in our Sovereign Ratings Methodology. MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
CREDIT PROFILE Our determination of a sovereign’s government bond rating is based on consideration of four rating factors: economic strength, institutions and governance strength, fiscal strength and susceptibility to event risk. When a direct and imminent threat becomes a constraint, that can only lower the scorecard-indicated outcome. For more information, please see our Sovereign Ratings Methodology. Economic strength score: a1
Factor 1: Overall score
Scale aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca + Final - Factor 1: Sub-scores
Norway a1 Score for Norway Median of countries with Aaa rating
SCALE OF THE GROWTH DYNAMICS ECONOMY NATIONAL INCOME weight 25% weight 10% weight 30% weight 35% Average real GDP (% change) Volatility in real GDP growth (ppts) Nominal GDP ($ bn) GDP per capita (PPP, Intl$) aaa aa
a
baa
ba
b
caa ca Economic strength evaluates the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as in structural factors that point to a country’s long-term economic robustness and shock-absorption capacity. Adjustments to the economic strength factor score most often reflect our judgement regarding the economy's flexibility, diversity, productivity and labour supply challenges. Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score will appear in the table above.
Our “a1” assessment of Norway’s economic strength reflects its large economy, low volatility in real GDP growth and strong competitiveness because of the flexibility of its wage-setting model and exchange rate. Moreover, per-capita income is more than double the threshold for a “aaa” assessment among the sovereigns we rate. The “a1” score is in line with Denmark (Aaa stable) and New Zealand (Aaa stable).
Exhibit 1
Peer comparison table factor 1: Economic strength United New Norway a1 Median Abu Dhabi China Denmark Qatar Kingdom Zealand Aaa/STA Aa2/STA A1/STA Aaa/STA Aa3/STA Aaa/STA Aa3/STA Final score a1 a1 a1 a1 a1 a1 a1 Initial score a1 baa1 aa3 a1 a3 a1 baa1 Nominal GDP ($ billion) 362.5 358.9 195.3 14,722.8 355.2 2,707.7 208.9 157.9 GDP per capita (PPP, Intl$) 65,800.1 51,267.3 125,740.0 17,191.7 58,932.8 44,116.9 42,018.1 93,508.4 Average real GDP (% change) 1.8 1.9 1.5 5.9 2.1 1.1 3.3 1.3 Volatility in real GDP growth (ppts) 1.0 2.7 4.1 1.8 1.8 3.7 1.7 4.5 Sources: National authorities, IMF and Moody's Investors Service
Long-term growth challenges include an ageing population that may further shrink growth in the labour force, which is already characterised by comparatively short working lives relative to average longevity. Moreover, a structural decline in hydrocarbon production and lower oil prices represent a change from many years of high oil prices, which is weighing on economic activity.
2 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Nominal GDP was around $362.5 billion in 2020, broadly in line with Denmark. GDP per-capita on a purchasing power parity basis of $65,800 in 2020 is higher than in Denmark ($58,933) and New Zealand ($42,018) and well above the a1 median ($51,267), but in line with the Aaa-median subfactor score of “aaa” (see Exhibit 2). Average real GDP growth between 2016 and 2025F is slightly below the median of Aaa-rated sovereigns, while its size – as measured in nominal billion US dollars – is around half of the Aaa median.
Exhibit 2 The size and growth of Norway's economy are lower thanNetherlands the Aaa median, but wealth levels are considerably higher Average Average real growth GDP (2016
New Zealand Germany 1.0 3.0 Australia 2025F)
- 40,000 60,000United States of America 80,000 100,000 120,000 GDP per capita, PPP basis, internationalSingapore $ (2020) 2.5 Canada Luxembourg Denmark 2.0 Median Aaa Norway Sweden Switzerland 1.5 Netherlands
AverageGDP growthreal (2016 Germany 1.0 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 GDP per capita, PPP basis, international $ (2020)
Note: Size of the bubble depicts size of 2019 nominal GDP in US dollars Source: Moody's Investors Service
Hydrocarbon sector's contribution to the overall economy will diminish in the longer term
The hydrocarbon sector has been an important contributor to economic growth since the government began to fully exploit the economic potential of Norwegian oil and gas reserves in 1971, and has contributed to the government’s vast savings in the Government Pension Fund Global (GPFG).
The sector’s contribution to growth diminished following the 2014-16 decline in global oil prices. However, the cost-competitiveness of Norwegian producers has since improved, with operating and development costs declining by 20% and 50%, respectively, from their levels in 2013-14. Norwegian producers' costs, which range from $30 to $55 per barrel, now fall between those of onshore Middle East and North American shale oil production on the global marginal cost curve. The Ministry of Petroleum and Energy cut Norwegian production in 2020 to support faster stabilisation of oil market conditions, which were affected by the coronavirus pandemic.
The uncertainty created by the pandemic and deep and temporary decline in oil prices weighed on oil and gas investment in 2020. The decline was cushioned by temporary tax reductions for oil companies introduced by the government in June 2020. Despite a recovery in oil prices this year, petroleum investment is likely to continue to decline in 2021 and 2022, reflecting the completion of a number of large development projects, such as Johan Sverdrup and Johan Castberg that supported investment levels until 2019. However, a temporary tax package, estimated to potentially free-up liquidity for investment equivalent to NOK115 billion over 2020-21, provides the oil companies with an incentive to launch new development projects before the end of 2022, which will support an increase in petroleum investment in 2023 and 2024.
The tax changes aim to support oil companies’ cash flow and make new projects more profitable after tax. They also provide oil companies with incentives to launch projects that are now on hold and bring forward investment projects that had been planned to start in the next few years. The authorities also expect oil companies’ investment to be supported by projects that target reductions in greenhouse gas emissions.
Statistics Norway's (SSB) latest oil investment survey raised its investment forecasts for both 2021 and 2022 (see Exhibit 3). The SSB's forecast for total oil investment in 2021 grew by NOK8.3 billion to NOK181.9 billion between its first-quarter and second-quarter projections, slightly higher than actual investment of NOK179.3 billion in 2020. However, significantly lower investment is likely in 2022, with the latest projection suggesting investment of NOK142.8 billion.
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Although the hydrocarbon sector will remain a crucial part of Norway's economy for the foreseeable future, its contribution to GDP has diminished, remaining around historical (1982-2010) averages in recent years (see Exhibit 4). Policymakers have long anticipated these trends and have been prepared to make adjustments to ease the transition to a less oil-abundant economy.
Exhibit 3 Exhibit 4 Investment projections see a decline in oil production … … and the oil sector's contribution to the Norwegian economy has NOK billion diminished below the historical average %
Actual investments SSB Q1F SSB Q2F Share of investments Share of exports 200 60 Share of state revenues Share of GDP 180 50 160
140 40
120 30 100
80 20 60
40 10 Long-term average share of GDP 20 0 0 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2016 2017 2018 2019 2020 2021 2022 Sources: SSB and Moody's Investors Service Sources: Norwegian Petroleum Directorate, SSB and Ministry of Finance
Recovery is underway after the double shock of the coronavirus pandemic and oil price fall in 2020
Despite the double shock posed by the coronavirus pandemic and the temporary oil price fall in 2020, the Norwegian economy registered a relatively mild contraction. Mainland real GDP (excluding the oil sector) contracted by 2.5%, while economic activity from petroleum activities and ocean transport grew by 8%. This resulted in real GDP growth contracting by 0.8% in 2020 after growth of 0.9% in 2019. This relatively high economic resilience is explained by large fiscal buffers, which allowed a comprehensive package of support measures, efficient virus containment measures and high degree of public compliance, and the strong capacity of consumers and businesses to adapt, supported by a high level of digitalization.
After the deep economic contraction in March and April last year, reflecting a substantial reduction in household consumption (especially services) and investment, activity levels started to recover before the summer, supported by the government's extraordinary fiscal measures and looser monetary conditions. A new round of containment measures weighed on economic activity in later 2020 and early 2021, and mainland real GDP contracted by 1% in the first quarter of this year. However, growth resumed in April (up 0.3% compared with March) and is likely to pick up as containment measures are eased.
We expect mainland real GDP to rebound to 3.1% in 2021, as the economy reopens and the vaccine rollout progresses, and to accelerate to 3.5% in 2022. The government has set out a four-step plan to reopen the economy depending on the evolution of the pandemic and moved to the second phase at the end of May. The authorities expect the entire adult population to have received their first dose of vaccine by early August. Norway has participated in the EU vaccine purchase programme despite not being a member of the EU (Aaa stable). However, its vaccination progress lags the average in the EU, US (Aaa stable) and UK (Aa3 stable). As of 7 June 2021, the share of the population that had received at least one dose of COVID-19 vaccine was 33.6%, below the EU level of 41.5%.
Norges Bank’s (Norway's central bank) regional network report1 on output growth points to solid growth in all sectors in the coming six months, particularly in household services (see Exhibit 6). Limited consumption opportunities have increased households’ savings and we expect consumption to improve over the course of 2021 and pick up significantly in 2022 (although there is some uncertainty over how rapid the normalisation of the consumption pattern will be). This, coupled with the recovery in investment and exports, will support robust growth next year, although the evolution of the pandemic continues to pose a risk.
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Exhibit 5 Exhibit 6 The economy is likely to bounce back from the COVID-19 shock in … with lower expectations for the coming year 2021 … -5 to +5, based on annualised growth expectations in the next six months Percentage point contribution to real GDP growth
Discrepancy Imports Overall Output Manufacturing Exports Change in Inventories GFCF Govt. Consumption Expenditure Export Industry Domestic Oil Services Private Consumption Expenditure Real GDP Growth 3 Export Oil Services 6% 2
4% 1 0 2% -1
0% -2
-3 -2% -4
-4% -5
-6% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E2021F 2022F Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Sources: SSB and Moody's Investors Service Sources: Norges Bank and Moody's Investors Service
After rebounding in 2021-22, we expect mainland GDP to average 2% over the period 2023-25. We expect scarring from the crisis on Norway’s economy will be limited, as the large fiscal support continues in 2021 until economic conditions normalize. Furthermore, Norway has very strong institutions and fiscal space to calibrate the policy response according to the evolution of the pandemic, limiting potential damage to the productive capacity and persistently higher unemployment.
After deteriorating significantly because of the pandemic, labour market conditions are improving …
According to the Norwegian Labour and Welfare Administration, the registered unemployment rate, which peaked at 10.6% in March 2020 as a result of temporary layoffs because of Norway's lockdown, declined until October before partly reversing in later 2020 and early 2021. The registered unemployment rate was 3.3.% in May 2021, down from 4% in April, as individuals were reemployed because of the easing of restrictions.
At the onset of the pandemic, unemployment levels as measured by the Labour Force Survey were lower than the figures from the Norwegian Labour and Welfare Administration, but increased in the subsequent months as individuals who had been unemployed for at least three months2 and new labour market entrants who were unable to find work were included (see Exhibit 7). The pandemic and its economic effects may have long-term implications for the labour market. Long-term unemployment increased significantly in 2020 and the number of individuals seeking work for more than six months has remained high. Long-term unemployment can reduce the probability of returning to work. Severe downturns have previously been followed by long periods of lower labour force participation, most recently after the fall in oil prices in 2014. According to the SSB's projections, unemployment as measured by the Labour Force Survey will gradually decline, but will not return to its pre-pandemic level until 2023.
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Exhibit 7 Exhibit 8 Unemployment rates spiked because of furloughs … … with 25-54 year-olds hit hardest % Change in unemployed people (thousands), four-quarter moving average
16 - 24 Years Old 25 - 54 Years Old 55 - 74 Years Old 12 NAV (%) Statistics Norway (%) 12
10 10 8
8 6
4
6 2
0 4 -2
-4 2 -6
0 2016 2017 2018 2019 2020 2021 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021
Sources: Norwegian Labour and Welfare Administration, and SSB Source: SSB
… and pressure on wages will likely moderate
In Norway's wage negotiation model, bargaining between social partners begins in the tradable sector by a wage norm being negotiated based on profitability considerations. This wage norm then forms a basis for wage negotiations in other sectors of the economy. Small wage increases in the sectors most exposed to foreign competition effectively capped wage hikes throughout the economy, yielding real wages that were broadly flat or slightly negative.
Low wage growth, combined with a weaker krone, have supported Norway’s competitiveness despite weaker productivity gains in the past few years. Norway's wage-setting model has historically provided a buffer against economic downturns and is likely to play this role again in the current downturn.
Average annual wages rose by 3.1% in 2020, which was higher than the negotiated wage norm, because of the significant decline in the number of employees in low-wage sectors. As the economy reopens and economic activity recovers, the compositional effect is likely to reverse, containing average wage growth in 2021 below that of 2020. The norm for this year’s wage negotiations between the Norwegian Confederation of Trade Unions and the Confederation of Norwegian Enterprise was 2.7%.
As in the past, a weaker exchange rate has helped to buffer the economy from unfavourable developments in the oil sector by facilitating growth in non-oil exports (see Exhibit 10). The impact of the 2014-16 oil price collapse on Norway's economy was ultimately relatively small. The effects were largely confined to the region around Stavanger, where the country's oil and gas sector facilities are concentrated, and were contained by companies' cost savings. A worse outcome was also avoided because of the flexible exchange rate and wage moderation. The economy proved also to be resilient to the deep but temporary fall in oil prices last year. The krone depreciated significantly in March 2020 and partly recovered following central bank intervention, though it remained weaker than historical levels.
6 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 9 Exhibit 10 Real wage growth is likely to slow compared with 2020 A flexible krone tends to dampen the negative impact of lower oil Annual change, % prices $, LHS; Index 1990 = 100, RHS
Real wages Inflation Nominal wages Brent $ per Barrel NOK per USD (rhs) 7 160 140
6 140 130 5 120 4 120 100 3
2 80 110
1 60 100 0 40 -1 90 20 -2
-3 0 80
Sources: Norges Bank and International Energy Agency Sources: SSB and Moody's Investors Service
Demographic dynamics will weigh on growth over the long term
Norway's population growth has slowed over the past decade. The population grew by just 0.5% in 2020, below the 10-year annual average of 0.9% and the slowest pace since 2001. Net population growth has slowed since 2014 largely because of falling immigration (see Exhibit 11).
Immigrants and first-generation Norwegians rose as a share of the population to 18.2% at the beginning of 2020 from 4.3% at the beginning of 1992. However, immigration to Norway following the EU's 2004 expansion has slowed to a trickle. As a result, labour productivity growth has been relatively flat over the past decade (see Exhibit 12).
Exhibit 11 Exhibit 12 Declining immigration has slowed population growth … … and has occurred during a period of weaker labour productivity People, thousands growth Annual change in labour productivity, GDP per hour worked
Births Deaths 3% 200 Emigration Immigration Total Population Change 2% 150
Thousands 1%
100 0%
50 -1%
0 -2%
-50 -3% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -100 Source: OECD 1996 2000 2004 2008 2012 2016 2020
Source: SSB
In common with most advanced economies, Norway faces long-term demographic challenges as the “baby boomer” generation ages and enters retirement. Better healthcare means that these retirees live longer, placing a greater burden on the lower numbers of active workers who must support the welfare and healthcare costs of both the elderly and school-age populations. Unlike most advanced
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economies, Norway’s sovereign wealth fund increases the government's ability to cope with the costs of this trend (see Exhibit 13). However, despite its substantial size, the GPFG is not sufficient to solve these challenges by itself.
Exhibit 13 The government’s deficit, measured without oil revenue, is now just covered by GPFG returns %
3% of the GPFG (as % of mainland trend GDP) Structural non•oil deficit as a % of trend mainland GDP 14%
12%
10%
8%
6%
4%
2%
0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F Sources: Ministry of Finance and Moody's Investors Service
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Institutions and governance strength score: aaa
Factor 2: Overall score
Scale aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca + Final - Factor 2: Sub-scores
Norway aaa Score for Norway Median of countries with Aaa rating
QUALITY OF INSTITUTIONS POLICY EFFECTIVENESS
weight 20% weight 20% weight 30% weight 30% Quality of Legislative and Executive Institutions Strength of Civil Society and the Judiciary Fiscal Policy Effectiveness Monetary Policy Effectiveness aaa aa
a
baa
ba
b
caa ca Institutions and governance strength evaluates whether the country’s institutional features are conducive to supporting a country’s ability and willingness to repay its debt. A related aspect is the government's capacity to conduct sound economic policies that foster economic growth and prosperity. Institutions and governance strength is most often adjusted for the track record of default, which can only lower the final score. Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score will appear in the table above.
Norway is one of the few countries we assess as having the highest level of institutional strength, being ranked at “aaa” in every subfactor. The ranking reflects responsible management of the economy, the country's effective and predictable judicial system and a high level of government transparency, as well as the virtual absence of corruption. Norway's scores exceed those of the median Aaa and median aaa F2 scores for most indicators, as the table below shows. Sovereigns sharing a “aaa” F2 score include Canada (Aaa stable), Denmark and Finland (Aa1 stable).
Exhibit 14 Peer comparison table factor 2: Institutions and governance strength New Norway aaa Median Canada Denmark Finland Netherlands Sweden Zealand Aaa/STA Aaa/STA Aaa/STA Aa1/STA Aaa/STA Aaa/STA Aaa/STA Final score aaa aaa aaa aaa aaa aaa aaa Initial score aaa aaa aaa aaa aaa aaa aaa Quality of legislative & executive institutions aaa aaa aaa aaa aaa aaa aaa aaa Strength of civil society & judiciary aaa aaa aaa aaa aaa aaa aaa aaa Fiscal policy effectiveness aaa aaa aaa aaa aaa aaa aaa aaa Monetary & macro policy effectiveness aaa aaa aaa aaa aaa aaa aaa aaa Fiscal balance/GDP (3-year average) 0.3 -3.6 -7.9 -1.8 -4.6 -3.9 -3.6 -2.5 Average inflation (% change) 2.0 1.5 1.8 0.9 1.2 1.4 1.6 1.5 Volatility of inflation (ppts) 0.8 0.9 0.6 0.9 1.2 1.1 1.0 1.0 Sources: National authorities, IMF and Moody's Investors Service
Norway's Worldwide Governance Indicators (WGI) scores are among the highest of the countries we rate, similar to the other mainland Nordic countries and ahead of the Aaa medians (see Exhibits 15 and 16).
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Exhibit 15 Exhibit 16 Norway receives very high WGI scores for governance … … that are either on a par with or exceed its peer group Percentile rank among Moody's-rated sovereigns Percentile rank among Moody’s-rated sovereigns
Government Effectiveness Rule of Law Norway Median - aaa F2 Median - Aaa Control of Corruption Voice & Accountability 101 Political Stability 99 100 95 97 Government Regulatory Quality 90 Effectiveness 95 85 93 80 91 Voice and 89 Rule of Law Accountability 87
85 Control of 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Corruption Sources: Worldwide Governance Indicators and Moody’s Investors Service Sources: Worldwide Governance Indicators and Moody’s Investors Service
Institutional strength marked by consistent adherence to the fiscal rule …
The Norwegian government adheres to its fiscal rule, which specifies the amount of oil and gas-related government revenue that can be used in each year’s budget. Petroleum revenue net of public investment in the sector is directly saved in the GPFG. The amount needed to cover the non-oil deficit is transferred back to the budget.
The fiscal rule stipulates that only a “gradual and sustainable” amount of such revenue can be transferred to the government’s budget (also depending on the stage of the business cycle), and the amount is determined by the expected real return on the GPFG over time. The real annual rate of return was estimated at 4% in 2001, and this was the guideline for actual fund transfers to the central government budget until February 2017. At that point, in keeping with a special expert commission's recommendations, the government reduced the fund’s estimated return to 3%, with the 2018 budget being formulated with the new guideline for fund transfers. The reduction in the estimated fund return coincided with growing government expenses, particularly in areas related to the ageing population and social benefits.
In the 2021 revised national budget, which was published in May, the government decided to maintain its planned spending of petroleum revenue as a percentage of the GPFG's capital (at the beginning of 2021) at 3.7%, in line with 2020, largely to mitigate the negative shock from the coronavirus. Although the “fiscal impulse”, as measured by the percentage-point change in the structural non- oil budget deficit as a percentage of trend GDP for mainland Norway, is expected to narrow to 0.6 percentage points (pps) in 2021 compared with 3.9 pps in 2020, the revised budget implied a continuation of the large expansionary fiscal stance seen in 2020.
The fiscal framework has helped shield the economy and public finances from the effects of oil price volatility because such volatility does not directly affect the budget, only returns for the fund. Accordingly, the impact of oil price volatility is much less significant for Norway's economy and budget than for other commodity producers.
While other countries have established fiscal rules with similar intent to Norway's (notably Chile (A1 negative) with copper), no natural resource-rich country has segregated so much of its income from commodities. Since the fund's inception, NOK3,408 billion has been transferred to it.3 Net withdrawals amounted to NOK170 billion in 2016-17 and NOK311 billion in 2020, a fraction of the fund's present value (9 June 2021) of more than NOK11.2 trillion.
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… and proactive management of hydrocarbon and financial resources
Norway established its sovereign wealth fund (which was then called the Government Petroleum Fund) in 1990, and its first capital transfer to the fund was in 1996. The GPFG's mandate is to invest the country’s hydrocarbon-related wealth responsibly, as well as balance risks against returns. The fund invests solely in foreign assets to reduce distortions in the domestic economy that typically arise from unrestrained spending of earnings from plentiful natural resources.
The fiscal rule and the accumulated savings in the GPFG will enable the government to extend the financial benefits of the country's nonrenewable resources to many generations in the future. The government expects the fund to last indefinitely.
Alongside the 2017 decision to reduce the estimated return, the government initiated an increase in the strategic asset allocation to equity investments away from fixed-income assets. Following a suggestion from the government, parliament decided to increase the GPFG's equities allocation to 70%. In addition, since 2017, unlisted real estate investments – which accounted for 2.5% of the fund’s value as of the end of 2020 – have been removed from the fund’s benchmark index. NBIM can now decide which real estate investments will be made, up to a maximum of 7% of the fund's value.
The GPFG is the world’s largest sovereign wealth fund in value terms and, at around 320% of nominal GDP at the end of 2020, the third-largest as a percentage of GDP behind Abu Dhabi's (Aa2 stable) and Kuwait’s (A1 stable). Norway's system of managing its natural resource income is a model that a number of other countries have tried to emulate, but generally with far less success because of their weaker institutional strength or lower economic diversification. The Ministry of Finance has formal responsibility for managing the fund, while Norges Bank conducts its operational management.
The fund's governance structure and investment strategy have become the subject of political debate in recent years. In 2018, an expert commission recommended that the fund be moved from the central bank's management to that of a new state investment company, to be established and overseen by the Ministry of Finance. The recommendation aimed to alleviate the demands placed on Norges Bank from managing the fund, and allow both the fund and the bank to focus on their respective objectives. In 2019, the government decided to retain the fund's management within the central bank rather than an independent organisation. Nevertheless, the willingness to regularly reevaluate the fund's structure, as well as its investment approach, highlights the authorities' flexibility and openness to adapt as the economic and fiscal situation evolves.
Gradual monetary policy normalisation will start this year
Norges Bank is an independent central bank that has adhered to a flexible inflation-targeting monetary policy regime since March 2001. Consumer price inflation was 2.7% year-on-year in May 2021, well above the 2020 average of 1.3%. However, consumer price inflation adjusted for tax changes and excluding energy products was 1.5% in May 2021, 1.5 pps below the 3.0% average in 2020.
These levels compare with an annual consumer price inflation target of close to 2% over time. Since the coronavirus emergency began, Norges Bank has reduced its policy rate by a total of 150 basis points to 0%. In its latest meeting in June, the bank kept the policy rate at 0%. In considering the trade-offs facing monetary policy, the bank placed weight on the contribution of low interest rates in supporting the normalisation of economic conditions, reducing the risk of unemployment becoming entrenched at a high level. The bank also acknowledges that a long period of low interest rates increases the risk of a build-up of financial imbalances, given the marked rise in house prices since spring 2020.
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Exhibit 17 Norges Bank estimates the output gap was at its lowest in 2020 %
Output Gap CPI-ATE Policy Rate 4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6% Q1-2015 Q1-2016 Q1-2017 Q1-2018 Q1-2019 Q1-2020 Q1-2021 Q1-2022F Q1-2023F Q1-2024F
Source: Norges Bank
In response to the coronavirus shock, Norges Banks also implemented additional measures to loosen financial conditions, including providing liquidity for banks through extraordinary F-loans in Norwegian kroner and US dollars. Furthermore, the Ministry of Finance has implemented Norges Bank’s advice to reduce the countercyclical capital buffer for banks to 1.0% from 2.5% until the economic uncertainty diminishes. Recently, Norges Bank advised the Ministry of Finance to raise the countercyclical capital buffer requirement to 1.5%, effective from mid-2022. Norges Bank expects its monetary policy stance to remain expansionary in 2021, but has signalled the policy rate will most likely be raised in September as economic conditions gradually normalise.
Macroprudential regulation mitigates the risks posed by the housing market
Norwegian house prices almost tripled between 2000 and 2017, and reached an all-time high in February 2021. The trend has been fuelled in recent years by Norges Bank’s accommodative stance, insufficient supply in many areas, such as the Oslo region, and long- standing tax benefits for Norwegian property owners.
In response to accelerating property price inflation and rising household indebtedness, the authorities introduced a series of macroprudential measures, including maximum loan-to-value (LTV) and loan-to-income ratios, affordability tests for borrowers and amortisation requirements. These regulations were renewed in December 2020 for four years, but will be reevaluated in 2022. The ministry also left in place special regulations for Oslo mortgage borrowing in light of particularly large price gains there.
Growth in house prices moderated significantly in the two years before the coronavirus shock, because of greater supply, ad hoc regulation and the normalisation of monetary policy. Prices in Oslo have continued to increase faster than in other regions, but regional differences that were amplified by the 2014-16 oil price shock have gradually narrowed. Nonetheless, household debt remains a credit challenge for both households and banks (see the Factor 4 section on banking sector risk for further details). More than 90% of all mortgages in Norway carry variable interest rates.
Housing market activity temporarily slowed at the beginning of the coronavirus pandemic. However, house price growth resumed in May 2020 and continued until February 2021, reflecting low interest rates, limited supply of new housing and a likely larger share of income spent on housing. Nevertheless, growth in house prices has moderated recently and gradual monetary policy tightening and increased housing supply are likely to put downward pressure on prices in the coming periods.
While there are risks to consumption growth in the event households need to designate more of their income to servicing their mortgage debt, most households have adequate buffers in the form of bank deposits and cash. However, for lower-income deciles and younger age groups, the debt burden is likely to remain larger than bank deposits and cash as a percentage of disposable income.
12 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Fiscal strength score: aaa
Factor 3: Overall score
Scale aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca
+ Final - Factor 3: Sub-scores
Norway aaa Score for Norway Median of countries with Aaa rating
DEBT BURDEN DEBT AFFORDABILITY
weight 25% weight 25% weight 25% weight 25% General government interest payments (% General government interest payments (% General government debt (% of GDP) General government debt (% of revenue) of revenue) of GDP) aaa aa
a
baa
ba
b
caa ca Fiscal strength captures the overall health of government finances, incorporating the assessment of relative debt burdens and debt affordability as well as the structure of government debt. Some governments have a greater ability to carry a higher debt burden at affordable rates than others. Fiscal strength is adjusted for the debt trend, the share of foreign currency debt in government debt, other public sector debt and for cases in which public sector financial assets or sovereign wealth funds are present. Depending on the adjustment factor, the overall score of fiscal strength can be lowered or increased. Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score will appear in the table above.
We assess Norway’s fiscal strength as “aaa”, the highest possible assessment in our scorecard, reflecting the sovereign's exceptional fiscal strength. The government’s balance sheet is extremely strong, even compared with other Aaa-rated sovereigns. The government is a substantial net creditor both domestically and externally because of the significant savings buffer it has accumulated in the GPFG. Countries sharing a “aaa” score for fiscal strength include Kuwait, Singapore (Aaa stable) and Switzerland (Aaa stable).
Exhibit 18
Peer comparison table factor 3: Fiscal strength Norway aaa Median Hong Kong Kuwait Singapore Switzerland Germany Denmark Aaa/STA Aa3/STA A1/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Final score aaa aaa aaa aaa aaa aa1 aa1 Initial score aaa aaa aa2 aa1 aaa aa1 aa3 Gen. gov. debt (% of GDP) 46.0 11.6 4.4 11.6 44.4 28.1 69.7 42.2 Gen. gov. debt (% of revenue) 84.9 43.6 25.8 43.6 252.3 83.6 148.8 79.9 Gen. gov. interest payments (% of GDP) 0.7 0.0 0.0 0.3 0.0 0.3 0.7 0.5 Gen. gov. int. payments (% of revenue) 1.3 0.0 0.0 1.1 0.0 0.7 1.4 1.0 Sources: National authorities, IMF and Moody's Investors Service
Large fiscal response supports economic recovery and will limit long term scarring
Norway’s rapid and comprehensive response to the coronavirus pandemic, involving three phases of financial measures, has cushioned its effect on the economy. The first phase included measures to rapidly address the acute financial challenges by protecting income for workers and facilitating access to liquidity for companies. In the second phase, the government presented measures and support schemes targeting the companies and sectors that were mostly affected by the crisis. In the current third phase, the government introduced measures to facilitate the return of unemployed people to work and broadly support economic activity.
13 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
The key measures included a temporary compensation scheme for otherwise sustainable companies suffering a significant drop in revenue because of the coronavirus pandemic; support and a guarantee scheme for the aviation industry; a loan guarantee scheme for small and medium-sized companies; and a Government Bond Fund to help large enterprises by purchasing corporate bonds.
The measures also included temporary unemployment benefit schemes and an income protection scheme targeting the self-employed; funding to support critical sectors such as healthcare; tax deferrals; a reduction in the VAT rate targeting certain sectors; and a temporary amendment to the petroleum tax that was estimated to improve the liquidity of oil companies by about NOK115 billion for 2020 and 2021.
Under the original 2021 budget published in October last year, the authorities had expected to gradually phase out pandemic support and significantly reduce withdrawals from the sovereign wealth fund. However, in response to the more prolonged effect of the coronavirus crisis than originally foreseen, the revised budget increases transfers to the municipal, healthcare and aviation sectors, and extends the redundancy scheme, as well as unemployment and sickness benefits. It also extends temporary reductions in the VAT rate for certain sectors, the wage support scheme, the loan-guarantee scheme, and support for the culture & events and public transportation sectors. The government has also proposed extending a diluted version of its compensation scheme for businesses until the end of October (with the option to terminate it early if economic conditions normalise).
The government expects these measures to increase the 2021 structural non-oil fiscal deficit to NOK402.6 billion (12.3% of mainland trend GDP) in 2021, from the NOK313.4 billion (9.4% of mainland trend GDP) originally announced in October 2020. This compares with a structural non-oil deficit of NOK238.6 billion (7.8% of mainland trend GDP) in 2019.
The revised budget estimates a structural non-oil fiscal deficit worth 3.7% of the value of the GPFG at the beginning of the year, which is in line with 2020 levels but larger than the 3.0% envisaged in the October budget. Although the government's fiscal stance remains expansionary, the fiscal impulse (measured by the percentage-point change in the structural non-oil budget deficit as a percentage of trend GDP for mainland Norway) is expected to narrow to 0.6 pps in 2021 from 3.9 pps in 2020. The general government deficit stood at 3% of GDP in 2020, compared with a surplus of 6.6% in 2019. We project that the deficit will remain close to balance in 2021.
Dependence on fund earnings to finance the non-oil deficit remains a long-term challenge
A key risk for the public finances in future is that the budget becomes more exposed to volatility in financial markets. This is because investment returns are likely to contribute more to the GPFG's growth than oil revenue, as oil and gas revenue gradually declines as reserves are depleted, particularly if oil prices stay relatively low for longer.
In addition, the structural non-oil fiscal deficit has grown rapidly over the past 15 years, approaching 8% of mainland GDP pre- pandemic and averaging an estimated 12% in 2020-21 (see Exhibit 19). There is a clear rationale for more stimulus when the economy is trending down, with a more neutral or even mildly restrictive fiscal policy stance resuming as the output gap closes and the economy recovers from the coronavirus pandemic.
Growth in the GPFG's value will derive solely from its earnings if net oil revenue fails to exceed the government's non-oil budget deficits. For example, the budget made net withdrawals from the fund in 2016 and 2017 following the previous oil price shock and in 2020, and net withdrawals are also expected this year (see Exhibit 20). However, the fund is likely to continue to grow, with fluctuations, over the next 15-20 years as investment earnings outpace transfers to cover annual non-oil budget deficits.
14 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 19 Exhibit 20 The fiscal package in 2020 and 2021 is likely to be unprecedented … and lead to substantial net withdrawals from the GPFG … NOK billion NOK billion
Plus: Transfers from GPFG GPFG Investment Income Minus: Net Revenues from Petroleum 600 Fiscal Surplus (Deficit) before GPFG 500 Net Transfer to GPFG Non-oil Budget Surplus (Deficit) Fiscal Budget Surplus (Deficit) Fiscal Budget Surplus (Deficit) 400 Series6 Fiscal Budget and GPFG Consolidated Surplus 400 300
200 200
100 0 0 NOK billionNOK -200 -100
-200 -400 -300
-600 -400 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021F 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021F
Sources: SSB, Ministry of Finance and Moody’s Investors Service Sources: SSB, Ministry of Finance and Moody’s Investors Service
A related concern is that the GPFG's large size could create disincentives to contain fiscal expenditure. Although the GPFG was worth around 320% of nominal GDP at the end of 2020, its share of GDP (though not its nominal value) is likely to decline gradually, particularly as growth in mainland GDP increases and oil revenue reduces and eventually ceases. With transfers from the fund to the budget approaching the new 3% expected real return, and net contributions from oil revenue to the GPFG likely to ease gradually over the long term, the space to expand the fund's principal is shrinking.
Given the government's track record of fiscal prudence and the temporary nature of the measures taken in response to the coronavirus pandemic, we expect the structural non-oil public deficit to return to around 3% of the GPFG in the medium term. Apart from the exceptional circumstances posed by the coronavirus shock, the authorities are likely to continue to consume around 3% of the fund's value every year (the expected real return) as a matter of policy, depending on the stage of the cycle.
The GPFG's value is likely to plateau accordingly. As this transition occurs, the government may consider additional changes to how much of the fund is used in annual budgets as costs related to Norway's ageing population grow. Prudent management to date and proactive steps by the authorities give us confidence that these issues will be addressed in a timely manner.
The government has not relied solely on the GPFG to guarantee the sustainability of public finances. High corporate and personal income tax rates have traditionally been used to bolster non-oil income (see Exhibits 21 and 22).
15 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 21 Exhibit 22 Central government revenue sources are diverse … … but the oil sector remains a key source of income for the state % GDP NOK billion
Taxes Net cash flow from SDFI 60% Equinor dividend Environmental taxes Royalties and area fees State net cash flow 50% 600
40% 500
30% 400
20% 300
10% 200
0% 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 100 Capital Taxes Current Transfers Administrative Fees Property Income 0 Social Security Contributions Taxes on Goods & Services 2000 2003 2006 2009 2012 2015 2018 2021F Sources: SSB, Norwegian Petroleum Directorate, Ministry of Finance and Moody's Investors Equinor = state-owned energy company (previously Statoil); SDFI = State's Direct Financial Service Interest (in the hydrocarbons sector) Sources: SSB, Norwegian Petroleum Directorate, Ministry of Finance and Moody's Investors Service
Partly because of concerns over the relatively large proportion of spending that goes to social benefits and the sustainability of the benefits system, the government reformed the National Insurance Scheme of old-age pensions in 2010 to (1) encourage workers to remain active in the labour force for longer; (2) link benefit levels to longevity; and (3) change the indexation rules. The effect of these reforms was limited, however, given the significant numbers of Norwegian workers who leave the labour force early because of sickness and disability.
General government gross debt is moderate
The non-oil budget deficit is covered by transfers from the GPFG and therefore does not imply any borrowing requirement. The main reason for the existence of government debt is that the central government borrows to cover lending to and capital injections into state lending institutions, such as state banks and government lending schemes, and to refinance or repay maturing debt. In addition, liabilities associated with repurchase agreements (repos) in the GPFG are counted as loan debt, according to the ESA95 government finances methodology. When repos fell after the global financial crisis, this was reflected in a reduction in the central government debt stock. Central government debt declined steadily to 14.4% of GDP at the end of 2019 after peaking at 25.8% in 2009, and consists almost entirely of government bonds (see Exhibit 23). However, the central government's debt-to-GDP ratio increased to 18.7% in 2020. In addition, exchange-rate fluctuations affect the size of the repos. After adding in local government debt, Norway’s gross general government debt increased to 46% of GDP in 2020 (see Exhibit 24).
The government's fiscal response to the coronavirus shock has increased its borrowing needs because the reestablished Government Bond Fund (with a limit of up to NOK50 billion) that has been financed by a gradual increase in the issuance of both government bonds and T-bills. Nevertheless, government debt increased only moderately compared with other sovereigns in 2020 because the fiscal measures taken to respond to the coronavirus pandemic have been financed using the oil fund.
16 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 23 Exhibit 24 Central government debt has stabilised recently … … but general government debt is set to increase moderately in % GDP 2020 % GDP
Government Bonds Treasury Certificates Short-Term Bonds Long-Term Bonds Long-Term Deposits Other Deposits 60% Loans General Government Debt Central Government Debt 30% 50%
25% 40%
20% 30% 15% 20% 10%
10% 5%
0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2021F 2020E 2020E Sources: SSB and Moody's Investors Service Sources: SSB and Moody's Investors Service
Government debt is in line with the median of Norway’s peers. Among Aaa-rated peers, those with lower debt-to-GDP ratios include Denmark at 42.2%, Luxembourg (Aaa stable) at 24.9%, New Zealand at 32.3%, Singapore at 44.4%, Sweden (Aaa stable) at 39.7% and Switzerland at 28.1% (see Exhibit 25). The median ratio for this group was 45.2% at the end of 2020. The US had the highest debt at 115.1% at the end of 2020.
Exhibit 25 General government debt is low compared with many Aaa-rated peers % of GDP
2020 2021F 2022F 140%
120%
100%
80%
60%
40%
20%
0% US Canada Germany Australia Netherlands Singapore Norway Denmark Sweden New Zealand Switzerland Luxembourg
Source: Moody's Investors Service
17 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Susceptibility to event risk score: a
Factor 4: Overall score
Scale aaa aa a baa ba b caa ca + Final - Factor 4: Sub-scores
Score for Median of countries with Aaa rating Norway a Norway
Overall adjustment to Factor 4 Susceptibility to Event Risk: 0
MIN. EXTERNAL VULNERABILITY RISK Political Risk Government Liquidity Risk Banking Sector Risk External Vulnerability Risk aaa
aa
a baa
ba b caa
ca Susceptibility to event risk evaluates a country’s vulnerability to the risk that sudden events may severely strain public finances, thus increasing the country’s probability of default. Such risks include political, government liquidity, banking sector and external vulnerability risks. Susceptibility of event risk is a constraint which can only lower the scorecard-indicated outcome. Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score will appear in the table above.
Our assessment of Norway's susceptibility to event risk is “a”. Of the four subfactors, the banking system is the area of slightly higher vulnerability because of its exposure to the oil sector, high household indebtedness and high commercial property prices, as well as banks' reliance on wholesale funding. Nevertheless, the risks are mitigated by Norwegian banks being well-capitalised, with very strong (though slightly deteriorating) asset quality, a tight regulatory framework and banks' heavy reliance on covered bonds, which are strongly collateralised. We assess political risk as “aa”, and government liquidity risk and external vulnerability risk as “aaa”. Countries with a similar banking sector risk score of “a”, which drives our assessment of susceptibility to event risk, include Belgium (Aa3 stable) and Denmark.
Political risk: aa
Exhibit 26 Peer comparison table factor 4a: Political risk Norway aa Median Australia Canada Denmark France Germany Sweden Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aa2/STA Aaa/STA Aaa/STA Final score aa aa aa aa aa aa aa Voice & accountability, score[1] 1.7 1.3 1.3 1.5 1.6 1.1 1.3 1.6 Political stability, score[1] 1.2 1.0 1.1 1.0 1.0 0.3 0.6 1.1
[1] Composite index with values from about -2.50 to 2.50: higher values correspond to better governance. Sources: National authorities, IMF and Moody's Investors Service
Our “aa” assessment of political event risk is driven by Norway’s consensus-driven political framework, which has shown itself to be proactive in addressing the country’s long-term economic and fiscal challenges. Norway has a long track record of stable coalitions and cooperation in parliament. In addition, the consensus style of governance limits risks of an abrupt change in policy direction, regardless of the parties in government.
18 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
The current ruling coalition, which includes the Conservative Party and two other small parties (the Liberals and the Christian Democrats) that was formed after longer than usual coalition negotiations following elections in September 2017, will reach the end of its term in September 2021. The ruling coalition represents a minority government after the Progress Party withdrew at the beginning of 2020. The next general election will be held on 13 September 2021. The centre-left Labour Party is in the lead according to opinion polls, while the popularity of the Centre Party, which campaigns in opposition to local government reforms and immigration, has risen in popularity since the elections in 2017 at the expense of the right bloc.
In respect of immigration, the coalition's policy platform increases the number of refugees allowed into Norway through the UN quota system and eases restrictions on immigration from countries outside the European Economic Area (EEA).4
In May 2018, the government published its strategy for cooperation with the EU over 2018-21. The strategy envisages and affirms continued economic, political and trade links, among others, with the EU, which is Norway’s largest trading partner, under the EEA agreement, which continues to benefit both Norwegian businesses and labour market participants.
However, long-term political risks may arise because of the challenges presented by an influx of asylum-seekers and economic migrants that much of Europe is struggling to deal with.
Government liquidity risk: aaa
Exhibit 27
Peer comparison table factor 4b: Government liquidity risk United Norway aaa Median Austria Denmark Finland Germany Netherlands Kingdom Aaa/STA Aa1/STA Aaa/STA Aa1/STA Aaa/STA Aaa/STA Aa3/STA Final score aaa aaa aaa aaa aaa aaa aaa Initial score aaa aaa aaa aaa aaa aaa aaa Ease of access to funding aaa aaa aaa aaa aaa aaa aaa aaa Gross borrowing requirements (% of GDP) 2.1 8.2 12.2 -- 15.7 6.0 12.7 16.1 Sources: National authorities, IMF and Moody's Investors Service
We assess government liquidity risk as “aaa” given the small gross borrowing requirement as the non-oil budget deficit is financed with transfers from the oil fund. The GPFG continues to serve as a shock absorber for fluctuations in the economic cycle and its presence has limited the need for the government to rely on external financing during downturns in the economic cycle. Foreign investors' holdings of just above 50% of general government debt highlight the safe haven status of Norway’s sovereign bonds.
Banking sector risk: a
Exhibit 28
Peer comparison table factor 4c: Banking sector risk United Norway a Median Belgium Denmark Finland Sweden Netherlands Kingdom Aaa/STA Aa3/STA Aaa/STA Aa1/STA Aaa/STA Aaa/STA Aa3/STA Final score a a a a a a a Initial score a a a a a a a BCA[1] a3 baa1 baa1 baa1 a3 a3 baa1 baa1 BSCE[2] aaa-a3 baa2 baa1 baa1 aaa-a3 aaa-a3 baa1 aaa-a3 Total domestic bank assets (% of GDP) 205.0 151.5 250.9 400.8 294.3 -- 318.1 405.8
[1] BCA is an average of Baseline Credit Assessments (BCAs) for rated domestic banks, weighted by bank assets. [2] Where we have no or small rating coverage in a system, we estimate the risk of Banking Sector Credit Event (BSCE) based on available data for aggregate banking system. Sources: National authorities, IMF and Moody's Investors Service
We assess Norway’s banking sector risk as “a”. The main risks come from a high share of wholesale funding, high (although mainly indirect) exposure to the oil sector, a heavy household debt burden and high commercial property prices. However, asset quality is strong, the system is well-capitalised and macroprudential measures imposed by banking regulators reduce some of the risks posed by the large scale of mortgage financing.
19 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Wholesale funding makes up about 50% of banks’ assets. The loan-to-deposit ratio of the entire financial system including finance companies was around 194% at the end of 2020. As a result, deteriorating conditions in global capital markets could create liquidity problems for local institutions. However, the risks posed by the high share of wholesale funding are mitigated by Norges Bank’s proven ability and willingness to provide liquidity when the domestic financial system has faced liquidity constraints stemming from deteriorating conditions in international wholesale markets. The market turmoil in the spring of 2020 affected the price of banks' market funding, but following the implementation of extensive fiscal and monetary policy measures, risk premiums rapidly returned to pre-pandemic levels. Local banks have steadily reduced their reliance on interbank funding since the global financial crisis by issuing covered bonds, while their aggregate liquidity coverage ratio (LCR) is well above the 100% minimum requirement (it was approximately 144% as of September 2020).
Furthermore, although the banking sector represented about 205% of nominal GDP in 2020, we consider the banks to be strong as measured by a system Baseline Credit Assessment (BCA) of a3 (excluding government-related issuer Kommunalbanken AS (Aaa stable), which has a BCA of a1). During 2020, Norwegian banks’ asset quality deteriorated only slightly and remains sound by European standards, as banks’ overall exposure to the most affected sectors, such as tourism and food services, is relatively contained. The banking system is also well-capitalised, with a Common Equity Tier 1 capital ratio of 17.8% as of September 2020. To support banks’ resilience following the shocks from the pandemic and lower oil prices, the Ministry of Finance reduced the countercyclical buffer to 1% in March 2020 from 2.5%. However, this reduction was offset by an 1.5% increase in the systemic risk buffer at end-2020. Norges Bank has recently advised the ministry to increase the countercyclical capital buffer to 1.5% from mid-2022, which is reflective of the Central Bank’s prudent oversight which support the banking system’s stability.
The Ministry of Finance introduced a minimum leverage ratio of 5% for banks and 6% for systemically important banks, which is above the Basel minimum requirement of 3%. This change also reduces risks in the sector.
Commercial real estate prices have been increasing rapidly, posing a risk to the financial sector given its significant exposure to this segment. Commercial real estate loans account for around 40% of banks’ corporate exposures. Potential structural changes induced by the pandemic on the property markets (including less demand for office space and hotels) may weigh on demand. Limited data availability has prevented a comprehensive assessment of the risks but Norges Bank has increased its efforts to build up data capacity on commercial property markets.
Risks from households' high levels of indebtedness are mitigated by buffers
Norway's household sector is one of the most indebted among advanced economies. Norwegians receive a tax subsidy on mortgage interest payments, which promotes property investment, and mortgage rates have been very low. Household debt amounted to 232% of disposable income at the end of 2020 (see Exhibit 29), with mortgage debt accounting for a large share. Households’ interest burden has remained favourable, however, because of the low interest rate environment. The housing market remains a source of vulnerability as the repayment capacity of several households would be weakened by a substantial interest rate increase, a fall in house prices or declining incomes.
20 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 29 Household debt continues to grow, but low interest rates ease households' interest burden % disposable income
Debt ratio Interest burden (rhs) 300% 10%
9% 250% 8%
7% 200% 6%
150% 5%
4% 100% 3%
2% 50% 1%
0% 0% Q1-2000 Q3-2000 Q1-2001 Q3-2001 Q1-2002 Q3-2002 Q1-2003 Q3-2003 Q1-2004 Q3-2004 Q1-2005 Q3-2005 Q1-2006 Q3-2006 Q1-2007 Q3-2007 Q1-2008 Q3-2008 Q1-2009 Q3-2009 Q1-2010 Q3-2010 Q1-2011 Q3-2011 Q1-2012 Q3-2012 Q1-2013 Q3-2013 Q1-2014 Q3-2014 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021
Sources: SSB, Norges Bank and Moody's Investors Service
Following the implementation of interim regulations on new mortgage restrictions in July 2015, Norwegian officials renewed a number of the measures in 2017, with the intention of either cooling the housing market or reducing risks for banks and borrowers. In February 2019, the Ministry of Finance adopted similar regulations on requirements for consumer loans. Measures on residential mortgage loans included (1) an 85% LTV cap for all mortgages; (2) a maximum 60% LTV for loans without scheduled instalments; (3) a 60% LTV cap for a secondary home located in Oslo; (4) a debt-to-income limit of 500%; (5) a requirement that a borrower’s debt-servicing capacity can tolerate an assumed interest rate increase of 5 pps; and (6) a loan amortisation requirement of 2.5% annually with an LTV above 60%. Banks are allowed to grant loans that deviate from these rules based on a customer-specific assessment5, but only up to 10% of the value of the new loans they extend, except in Oslo where the share is 8%. Following the coronavirus shock, this percentage was temporarily increased to 20% in the second and third quarters of 2020.
In 2021 a new regulation on requirements for new residential mortgage and consumer loans took effect and will be in force until the end of 2024. The new regulation keeps the previous provisions and leaves the flexibility quotas unchanged and will be reevaluated in 2022.
The controls also reflect concerns that Norwegian house prices may have reached unsustainable levels after their rapid increase since 2000. After declining temporarily at the onset of the coronavirus pandemic, house prices increased significantly in 2020 and early 2021 (particularly in Oslo) (see Exhibit 30), reflecting the impact of lower interest rates and households' lower consumption opportunities. Household debt remains high and continues to increase faster than incomes, while the share of households with a high debt-to-income ratio has risen in recent years. Norges Bank expects growth in house prices to moderate because of interest rate increases that are likely to begin in September this year, normalisation in household consumption and increased residential construction.
21 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 30 Macroprudential measures have helped to rein in house prices growth across Norway, although prices increased significantly in 2020 Annual change, %
Norway Bergen Oslo Stavanger Trondheim 30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15% Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Sources: SSB, Norges Bank and Moody's Investors Service
A regulation on requirements for financial institutions’ consumer credit standards was introduced in 2019 to prevent the build-up of additional vulnerabilities in the household sector. Consumer debt accounts for only around 3% of total household debt, and has declined over the past year after several years of rapid increases.
Nonetheless, households’ ability to service their debts is generally strong. Even during the Nordic banking crisis of the 1990s, direct losses on loans to households were limited. This was partly because of a strong savings culture. The household savings rate has long been around 5%-6%, having rebounded from a trough of negative 0.4% in 2006 and has increased markedly during the pandemic because of limited spending opportunities, low interest expenses and expanded government support schemes (see Exhibit 31). Moreover, many households have two incomes and Norwegian unemployment benefits are quite generous.
Nonetheless, the rise in household indebtedness has been highest for middle- and lower-income groups, according to Norges Bank data, unlike other European countries where the largest debt tends to be held by the wealthiest segment of the population. Additionally, younger cohorts of the population have significantly smaller buffers against their accumulated debt than older cohorts (see Exhibit 32). The proportion of households that have very high debt burdens as a percentage of disposable income has also increased.
Exhibit 31 Exhibit 32 Households have room to decrease their savings … … but younger cohorts of the population have smaller buffers % disposable income against their debt % disposable income
18% Bank deposits Debt 160 16%
14% 140
12% 120
10% 100
8% 80 6% 60 4% 40 2%
0% 20
-2% 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 25-34 35-44 45-54 55-66 >67
Sources: SSB and Norges Bank Sources: SSB
22 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
External vulnerability risk: aaa
Exhibit 33 Peer comparison table factor 4d: External vulnerability risk United Norway aaa Median Denmark France Germany Netherlands Switzerland States of America Aaa/STA Aaa/STA Aa2/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Final score aaa aaa aaa aaa aaa aaa aaa Initial score aaa aaa aaa aaa aaa aaa aaa Current account balance (% of GDP) 2.0 3.3 7.8 -1.9 7.0 7.8 3.8 -3.1 Net IIP (% of GDP)[1] 286.0 46.3 61.5 -26.5 76.2 114.8 94.2 -67.3
[1] Net international investment position (% of GDP). Sources: National authorities, IMF and Moody's Investors Service
We assess Norway’s external vulnerability risk as “aaa”. Norway continued to generate current-account surpluses through the oil price collapse of 2014-16 and the coronavirus pandemic in 2020, though the latter was smaller than in 2019 because of lower oil prices (see Exhibit 34). Given the government’s policy of investing excess revenue from oil and gas export receipts into overseas assets, Norway's net international investment position (IIP) has improved over the years and was 286% of GDP at the end of 2020 (see Exhibit 35), compared with around 52% in 2007. These accumulated assets provide Norway with an exceptionally large buffer against external shocks, greatly limiting the economy’s reliance on foreign capital inflows.
Exhibit 34 Exhibit 35 Weaker oil exports will weigh on the current-account balance … … and the already healthy net external creditor position % GDP % GDP
Crude Oil & Natural Gas Exports All Other Exports Assets: Direct investment Assets: Portofolio investment Imports Income & Current Transfers Assets: Other investments Reserve Assets 50% Current Account Balance 600% Liabs: Direct investment Liabs: Portofolio investment Liabs: Other investments Net IIP 40% 500%
30% 400%
20% 300%
10% 200%
0% 100% -10% 0% -20% -100% -30% -200% -40% -300% 2003 2005 2007 2009 2011 2013 2015 2017 2019 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: SSB and Moody's Investors Service Sources: SSB and Moody's Investors Service
23 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
ESG considerations Norway’s ESG Credit Impact Score is neutral to low (CIS-2)
Exhibit 36 ESG Credit Impact Score
Source: Moody's Investors Service
Norway’s neutral to low (CIS-2) ESG Credit Impact Score takes into account moderate exposure to environmental risk driven by carbon transition and the credit benefits deriving from its social profile. Very strong governance, very high income levels and exceptionally robust government balance sheet mitigate the sovereign’s susceptibility to E risk.
Exhibit 37 ESG Issuer Profile Scores
Source: Moody's Investors Service
Environmental The E issuer profile score is moderately negative (E-3), driven by moderate exposure to carbon transition. Because of its large dependence on hydrocarbons, Norway is exposed to the implications of carbon transition under a scenario of continued, albeit slower, growth in global hydrocarbon demand. Norway’s susceptibility to physical climate change risk is low.
Social We assess its S issuer profile score as positive (S-1). Norway is among the few sovereigns whose rating is supported by a number of social attributes. The score reflects a well-educated labour force, evenly distributed wealth, and very good quality healthcare and basic services, while the demographic challenges posed by its ageing population are manageable.
Governance Norway’s very strong institutions and governance profile supports its rating, as captured by a positive G issuer profile score (G-1), as the efficient and very transparent institutional framework provides a high degree of confidence in the authorities’ ability to implement effective policies. Coupled with exceptionally high wealth levels and financial strength, this supports a high degree of resilience.
All of these considerations are further discussed in the “Credit profile” section above. Our approach to ESG is explained in our report on how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector methodology General Principles for Assessing Environmental, Social and Governance Risks Methodology.
24 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Scorecard-indicated outcome Combining the scores for individual factors provides the scorecard-indicated outcome. While the information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ from the ones implied by the scorecard-indicated outcome. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the scorecard-indicated outcome. For more information please see our Sovereign Ratings Methodology.
Exhibit 38 Sovereign rating metrics: Norway
Economic How strong is the economic structure? strength Sub-factors: growth dynamics, scale of the economy, wealth aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca + - Economic resiliency
Institutions How robust are the institutions and how predictable aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca and are the policies? + -
governance Sub-factors: quality of the institutions, policy effectiveness, strength government default history and track record of arrears Government financial strength aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca + - + -
Fiscal How does the debt burden compare with the strength government's resource mobilization capacity? Sub-factors: debt burden, debt affordability, debt trend, share of foreign currency debt, contingent liabilities, fiscal reserves Scorecard-
aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca indicated + - outcome: Aaa - Aa2
Susceptibility What is the risk of a direct and sudden threat to debt to event risk repayment? Sub-factors: political risk, government liquidity risk, banking sector risk, external vulnerability risk Assigned rating:
aaa aa a baa ba b caa ca Aaa + -
Source: Moody's Investors Service
25 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Comparatives This section compares credit relevant information regarding Norway with other sovereigns that we rate. It focuses on a comparison with sovereigns within the same scorecard- indicated outcome and shows the relevant credit metrics and factor scores.
Norway compares favourably with its key peers, positioning it as a strong Aaa-rated sovereign. In terms of economic strength, Norway's score of “a1” puts it on a par with peers and better than the Western European median. However, the size of the economy contributes to a weaker position than the Aaa median despite Norway's higher wealth. Institutions and governance strength, driven by its exceptional institutional framework, allows Norway to outperform peers. Likewise, low debt levels, particularly as a share of general government revenue, yield a strong performance in fiscal strength. Banking sector risk drives Norway's susceptibility to event risk, in line with the Western European median and the Aaa median.
26 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 39 Norway's key peers Western Europe Norway Netherlands New Zealand Denmark Sweden Finland Aaa Median Year Median Rating/outlook Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aa1/STA Aaa Aa2 Scorecard-indicated outcome Aaa - Aa2 Aaa - Aa2 Aaa - Aa2 Aaa - Aa2 Aaa - Aa2 Aa1 - Aa3 Aaa - Aa2 Aa1 - Aa3 Factor 1 a1 aa3 a1 a1 aa3 a2 aa3 a2 Nominal GDP ($ bn) 2020 362.5 910.2 208.9 355.2 537.6 270.6 642.8 423.9 GDP per capita (PPP, Intl$) 2020 65,800 57,534 42,018 58,933 54,146 49,853 58,233 54,076 Avg. real GDP (% change) 2016 - 2025F 1.8 1.5 3.3 2.1 1.8 1.6 2.0 1.7 Volatility in real GDP growth (ppts) 2011 - 2020 1.0 2.0 1.7 1.8 2.0 2.0 1.9 2.6 Factor 2 aaa aaa aaa aaa aaa aaa aaa aa2 Quality of legislative & executive institutions Latest available aaa aaa aaa aaa aaa aaa aaa aa Strength of civil society & judiciary Latest available aaa aaa aaa aaa aaa aaa aaa aaa Fiscal policy effectiveness Latest available aaa aaa aaa aaa aaa aaa aaa aa Monetary & macro policy effectiveness Latest available aaa aaa aaa aaa aaa aaa aaa aa Gen. gov. fiscal balance (% of GDP) 2020 - 2022F 0.3 -3.9 -3.6 -1.8 -2.5 -4.6 -3.6 -4.5 Average inflation (% change) 2016 - 2025F 2.0 1.4 1.6 0.9 1.5 1.2 1.5 1.4 Volatility of inflation (ppts) 2011 - 2020 0.8 1.1 1.0 0.9 1.0 1.2 0.9 1.0 Factor 3 aaa aa3 aa1 aa1 aa2 a1 aa1 a1 Gen. gov. debt (% of GDP) 2020 46.0 54.5 32.3 42.2 39.9 69.2 45.2 69.4 Gen. gov. debt (% of revenue) 2020 84.9 124.1 111.2 79.9 80.0 135.0 117.7 160.0 Gen. gov. interest payments (% of revenue) 2020 1.3 1.6 4.1 1.0 0.6 1.3 1.3 2.6 Gen. gov. interest payments (% of GDP) 2020 0.7 0.7 1.2 0.5 0.3 0.7 0.7 1.1 Factor 4 a a baa a a a a a Political risk Latest available aa aa aaa aa aa aa aa aa Government liquidity risk Latest available aaa aaa aaa aaa aaa aaa aaa aaa Gross borrowing requirements (% of GDP) 2021F 2.1 12.7 17.3 -- 8.2 15.7 8.2 12.7 Banking sector risk Latest available a a a a a a a a BSCE[1] Latest available aaa-a3 baa1 aaa-a3 baa1 aaa-a3 aaa-a3 aaa-a3 baa1 Total domestic bank assets (% of GDP) 2020 205.0 318.1 194.1 400.8 -- 294.3 270.7 256.7 External vulnerability risk Latest available aaa aaa baa aaa aa aa aaa aaa Current account balance (% of GDP) 2020 2.0 7.8 -0.8 7.8 5.2 0.3 4.1 2.0 External vulnerability indicator (EVI) 2022F ------External debt (% of current account receipts) 2020 584.5 437.1 -- 256.3 345.7 135.8 391.4 434.9 Net international investment position (% of GDP) 2020 286.0 114.8 -55.0 61.5 17.9 1.0 61.4 27.7 [1] BSCE is our estimate of the risk of a Banking Sector Credit Event (BSCE), which we use for sovereigns where we have no or very limited rating coverage of a system. Otherwise, we use the Baseline Credit Assessment (BCA) for rated domestic banks, weighted by bank assets. Sources: National authorities, IMF and Moody's Investors Service
27 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
DATA, CHARTS AND REFERENCES Chart pack: Norway Exhibit 40 Exhibit 41 Economic growth Investment and saving
Real GDP volatility, t-9 to t (ppts) (RHS) Gross investment/GDP Gross domestic saving/GDP Real GDP (% change) (LHS) 45 4.0 1.8 40 3.5 1.6 3.0 1.4 35 2.5 1.2 30 2.0 1.0 1.5 25 0.8 1.0 20 0.6 0.5 15 0.0 0.4 -0.5 0.2 10 -1.0 0.0 5
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 2021F 2022F
Source: Moody's Investors Service 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2022F Source: Moody's Investors Service
Exhibit 42 Exhibit 43 National income Population
GDP per capita ($) GDP per capita (PPP basis, $) Population (Mil.) (LHS) Population growth (% change) (RHS) 120000 5.5 1.40
5.4 100000 1.20 5.3 1.00 80000 5.2 0.80 60000 5.1 0.60 5.0 40000 0.40 4.9 20000 4.8 0.20
0 4.7 0.00 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2022F 2021F 2022F Source: Moody's Investors Service Source: Moody's Investors Service
Exhibit 44 Exhibit 45 Global Competitiveness Index Inflation and inflation volatility Rank 17 out of 141 countries
Inflation rate volatility, t-9 to t (ppts) (RHS) Netherlands (Aaa/STA) Inflation rate (CPI, % change Dec/Dec) (LHS) 4.0 1.2
3.5 Sweden (Aaa/STA) 1.0 3.0 0.8 Denmark (Aaa/STA) 2.5
2.0 0.6 Finland (Aa1/STA) 1.5 0.4 1.0 Norway (Aaa/STA) 0.2 0.5
New Zealand (Aaa/STA) 0.0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0 5 10 15 20 2021F 2022F Source: World Economic Forum Source: Moody's Investors Service
28 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 46 Exhibit 47 Institutional framework and effectiveness Debt burden
Government Effectiveness[1] Rule of Law[1] Gen. gov. debt/GDP (%) (LHS) Control of Corruption[1] Voice & Accountability[1] Gen. gov. debt/gen. gov. revenue (%) (RHS) Regulatory Quality[1] 50 90 2.5 45 80 40 70 2.0 35 60 30 1.5 50 25 40 20 1.0 30 15 10 20 0.5 5 10 0 0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2021F 2022F Notes: [1] Composite index with values from about -2.50 to 2.50: higher values suggest Source: Moody's Investors Service greater maturity and responsiveness of government institutions. Source: Worldwide Governance Indicators
Exhibit 48 Exhibit 49 Debt affordability Financial balance
Gen. gov. interest payment/GDP (%) (LHS) Gen. gov. financial balance/GDP (%) Gen. gov. interest payment/gen. gov. revenue (%) (RHS) Gen. gov. primary balance/GDP (%) 1.4 2.5 16 14 1.2 2.0 12 1.0 10
0.8 1.5 8 6 0.6 1.0 4 0.4 2 0.5 0 0.2 -2 0.0 0.0 -4 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2022F 2021F 2022F Source: Moody's Investors Service Source: Moody's Investors Service
Exhibit 50 Exhibit 51 Government liquidity risk External vulnerability risk
Gen. gov. debt/GDP (%) (RHS) Current account balance/GDP (%) (LHS) Gen. gov. external debt/total gen. gov. debt (%) (LHS) Net international investment position/GDP (%) (RHS) 60 50 14 350 45 50 12 300 40 35 10 250 40 30 8 200 30 25 6 150 20 20 15 4 100 10 10 2 50 5 0 0 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Moody's Investors Service Source: Moody's Investors Service
29 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Rating history
Exhibit 52 Norway[1]
Long Term Ratings Outlook Review Action Short Term Ratings Action Date
Foreign Local Foreign Local Foreign Local Currency Currency Currency Currency Currency Currency
Aaa Aaa STA - - - - Nov-03 Aaa Aaa - - - - - Sep-97 Aa1 Aaa - - - - - Aug-95 Aa1 ------Jul-87 Aaa ------Jan-78
Notes: [1] Table excludes rating affirmations and ceilings. Please visit the issuer page for Norway for the full rating history. Source: Moody's Investors Service
30 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Annual statistics
Exhibit 53 Norway [1]
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2022F Economic structure and performance Nominal GDP (US$ bil.) 498.3 509.5 522.8 498.4 385.8 368.8 398.4 437.0 405.5 362.5 424.7 450.0 Population (Mil.) 5.0 5.0 5.1 5.2 5.2 5.3 5.3 5.3 5.4 5.4 5.4 5.5 GDP per capita (US$) 100,198 101,133 102,583 96,666 74,121 70,226 75,311 82,081 75,697 67,271 78,341 82,501 GDP per capita (PPP basis, US$) 61,828 65,101 66,742 65,647 60,190 58,736 62,782 64,598 65,905 65,800 -- -- Nominal GDP (% change, local currency) 7.8 6.1 3.6 2.3 -0.9 -0.4 6.4 7.8 0.4 -4.3 5.0 5.8 Real GDP (% change) 1.0 2.7 1.0 2.0 2.0 1.1 2.3 1.1 0.9 -0.8 2.9 3.7 Inflation (CPI, % change Dec/Dec) 0.1 1.4 2.0 2.1 2.3 3.5 1.6 3.5 1.4 1.4 2.8 1.2 Unemployment rate (%) 3.4 3.3 3.8 3.6 4.5 4.8 4.2 3.9 3.7 4.6 4.2 3.9 Gross investment/GDP 25.9 26.4 27.9 27.8 27.5 28.1 27.8 28.1 29.7 30.1 27.2 27.5 Gross domestic saving/GDP 38.8 39.6 38.7 37.1 33.2 30.1 31.3 33.8 31.3 29.6 27.9 26.7 Nominal exports of G & S (% change, US$ basis) 20.6 0.8 -1.1 -5.1 -25.0 -10.3 10.7 14.6 -11.2 -20.0 18.5 9.5 Nominal imports of G & S (% change, US$ basis) 15.8 -0.9 5.6 -0.2 -16.4 -0.2 5.9 7.7 -0.1 -15.1 18.2 10.7 Real exports of G & S (% change) -0.8 1.7 -1.8 3.4 4.3 1.1 1.7 -1.2 0.5 -0.5 2.9 7.2 Real imports of G & S (% change) 3.9 2.9 5.0 2.0 1.9 2.7 1.9 1.4 4.7 -11.9 2.7 8.3 Net exports of goods & services/GDP 12.9 13.1 10.8 9.3 5.7 2.0 3.5 5.7 1.6 -0.4 -0.4 -0.8 Openness of the economy[2] 69.7 68.2 67.5 68.7 69.9 68.9 69.2 70.2 71.0 65.5 66.2 68.7 Government Effectiveness[3] 1.8 1.9 1.9 1.8 1.9 1.9 2.0 1.9 1.9 ------Government finance Gen. gov. revenue/GDP 56.9 56.4 54.4 54.2 54.5 54.8 54.6 55.9 57.2 54.1 54.7 56.5 Gen. gov. expenditures/GDP 43.5 42.7 43.7 45.5 48.5 50.7 49.6 48.0 50.6 57.2 55.0 52.4 Gen. gov. financial balance/GDP 13.3 13.8 10.7 8.6 6.0 4.1 5.0 7.9 6.6 -3.0 -0.3 4.1 Gen. gov. primary balance/GDP 14.5 14.7 11.5 9.5 6.9 4.8 5.7 8.5 7.3 -2.3 0.4 4.8 Gen. gov. debt (US$ bil.)[4] 138.9 165.5 159.7 126.2 122.0 133.7 151.8 160.0 163.4 184.0 197.9 202.9 Gen. gov. debt/GDP[4] 29.8 31.1 31.6 29.9 34.5 37.2 37.8 39.1 40.2 46.0 46.1 45.5 Gen. gov. debt/gen. gov. revenue[4] 52.4 55.1 58.1 55.1 63.4 68.0 69.2 70.0 70.3 84.9 84.3 80.6 Gen. gov. interest payments/gen. gov. revenue 2.0 1.7 1.6 1.6 1.5 1.4 1.2 1.2 1.2 1.3 1.3 1.2 External payments and debt Nominal exchange rate (local currency per US$, Dec) 6.0 5.6 6.1 7.4 8.8 8.6 8.2 8.7 8.8 8.5 8.4 8.5 Real eff. exchange rate (% change) 4.3 0.7 -1.9 -2.9 -9.5 -1.0 3.2 2.0 -2.6 -5.0 -- -- Relative unit labor cost 92.2 92.7 94.4 96.1 100.0 102.1 98.9 96.2 101.3 106.3 -- -- Current account balance (US$ bil.) 61.7 64.2 53.9 54.1 31.0 16.4 21.8 34.8 11.5 7.1 24.6 27.9 Current account balance/GDP 12.4 12.6 10.3 10.8 8.0 4.5 5.5 8.0 2.8 2.0 5.8 6.2 Net foreign direct investment/GDP -0.5 0.1 -2.6 -4.2 -3.6 -6.8 0.7 -4.6 2.3 0.3 2.2 1.3 Net international investment position/GDP 91.7 92.8 126.9 168.0 197.8 204.8 220.1 196.0 245.1 286.0 -- -- Official forex reserves (US$ bil.) 45.6 48.0 54.6 61.6 54.6 57.9 63.0 60.2 63.6 71.6 73.1 72.9
[1] Economic forecasts based on an assumed average price for the benchmark Brent crude oil of $50/b in 2021 and $52/b in 2022. Our broad expectations are that prices will remain volatile within a range of $45-$65/b in the medium term. [2] Sum of Exports and Imports of Goods and Services/GDP [3] Composite index with values from about -2.50 to 2.50: higher values suggest greater maturity and responsiveness of government institutions [4] Data until 2013 reported under ESA95; ESA2010 from 2014 onwards. Includes liabilities associated with repurchase and re-sale agreements of securities used in the administration of Norway's sovereign wealth fund, as required by ESA accounting framework Source: Moody's Investors Service
31 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Moody's related publications
» Credit Opinion: Government of Norway – Aaa stable: Regular update, 4 May 2021
» Issuer Comment: Government of Norway: Large fiscal response under revised budget will limit economic scarring, 28 May 2021
» Sector In-Depth: Macroeconomics – Global: Coronavirus and the Economy: Alternative Data Monitor, 24 June 2021
» Sector In-Depth: Sovereigns – Global: Cyber risk survey indicates sovereigns define and rank risks differently, but preparedness is common priority, 20 June 2021
» Outlook: Sovereign – Global: Negative 2021 outlook as pandemic fallout weighs on economic activity, government finances, complicates policy choices, 10 November 2020
» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Related websites and information sources
» Sovereign risk group web page
» Sovereign ratings list
» Norges Bank
» Statistics Norway
» Ministry of Finance
MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services. The websites reached through these Links or References have not necessarily been reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control. Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services provided by any third party.
Authors Daniela Re Fraschini VP-Senior Analyst
Sean Kou Associate Analyst
Endnotes 1 The regional network report is a cyclical survey that covers approximately 1,500 companies, organisations, municipalities, hospitals and other public institutions. 2 SSB’s Labour Force Survey counts fully furloughed people as unemployed after three months. Thus, people who have been furloughed but reemployed within three months do not appear in these numbers. 3 Total inflow of capital adjusted for accrued, not paid, management fees. 4 The EEA is a free-trade zone composed of the 27 EU member states, Iceland (A2 stable), Liechtenstein and Norway. 5 Share of new residential mortgage loans per quarter for which banks may deviate from the requirement
32 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
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33 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
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34 6 July 2021 Government of Norway - Aaa stable: Annual credit analysis