Fri Oct 31, 2014 5:05pm EDT
(The following statement was released by the rating agency) LONDON, October 31 (Fitch) Fitch Ratings has affirmed Norway's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA'. The Outlooks are Stable. The issue ratings on Norway's senior unsecured bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS Norway's 'AAA' ratings reflect the strength of the sovereign balance sheet, very high human development and governance indicators, a very high income per capita, and a strong macroeconomic policy framework. North Sea revenues have been prudently managed and invested through a Sovereign Wealth Fund (SWF). At 2Q14, net public sector financial assets amounted to 208% of GDP, comfortably surpassing Norway's outstanding government debt (which stands at around 29% of GDP). Oil exports support the country's external position - the current account surplus has averaged 13.5% of GDP over the past 10 years. Norway's fiscal policy rule ensures that the non-oil deficit in structural terms should average 4% of the capital value of SWF. However, when the SWF is growing consistently faster than GDP, it can lead to fiscal expansions over a number of consecutive years - and the market value of the SWF is now around twice the size of the mainland economy. The Norwegian government recently announced that a commission will examine how to apply the fiscal rule and consider options for supplementing the rule with guidelines to avoid excessively loose fiscal policy. The draft budget for 2015 includes discretionary tax cuts worth just under NOK8.5bn (around 0.3% of GDP). Fitch expects only a slight fall in the government's balance over the forecast horizon, to 9.5% of GDP in 2016, from 10.9% in 2013. In itself, Norway's high commodity dependence is a rating weakness, although windfall revenues are a benefit. Moreover, an increasing share of economic activity is generated by the supply of goods and services to the oil sector, which creates competitiveness pressures in the rest of the economy. However, these risks are mitigated by Norway's strong economic policy framework, which safeguards economic stability. Its strong net asset position and substantial twin budget and current account surpluses mean that the recent dip in oil prices is not a rating issue for Norway. Norway's recent record of macroeconomic stability compared with its rated peers is an additional rating strength. Real mainland GDP declined by only 2.6% in the recession following the global financial crisis, and is almost 13% above its trough in 3Q09. Fitch expects GDP growth of 2.2% this year, and an average 2.5% over 2015 and 2016. House prices have risen strongly in recent years and household debt is high in Norway, although households have a strong net wealth position. House prices rose over 1H14, after falling by almost around 1.5% in 2H13. Household income has risen faster than house prices over the past six months, so the house price to income ratio has continued to edge down, and in 2Q14 was 8 percentage points lower than its peak in 1Q13. Sharp downward corrections in house prices could have a negative impact on private consumption, housing investment, and corporate profitability. RATING SENSITIVITIES Fitch judges Norway's credit profile as strong and solid, implying that a negative rating action in the near term is unlikely. However, the following factors could, individually or collectively, put downward pressure on the ratings: -An extreme and sustained fall in the oil price. This would represent a significant shock to the Norwegian economy, given its heavy dependence on the petroleum sector. -A worsening of economic imbalances. Sustained real wage growth not accompanied by productivity gains, or sharp increases in house prices, household indebtedness, and private sector credit, would not be sustainable in the medium term and would increase the risk of a sharp correction. - Over the longer term, a failure to address the fiscal burden of ageing would lead to an erosion of Norway's fiscal position. Current estimates imply that Norway's SWF would not be able to absorb the cost of an ageing population without corrective measures in the long run. KEY ASSUMPTIONS The ratings and outlooks are based on a number of assumptions: - Fitch's latest published forecasts are for Brent oil prices to average USD105p/b this year, USD100p/b in 2015 and USD95p/b in 2016. Recent outturns mean that some downward revision for 2014 and 2015 is likely in our December forecasting round. However, the agency views the likelihood of a fall in oil prices severe and sustained enough to materially erode Norway's buffers to be low. - Fitch assumes that the Norwegian government will continue to adhere to the fiscal policy rule in its current form. Consistent with the implementation of the rule, Fitch assumes that the long-term real return for the SWF will be 3%-4% per annum. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Krisjanis Krustins Research Analyst +44 20 3530 1487 Committee Chairperson Edward Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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