Fitch Affirms Norway at 'AAA'; Outlook Stable
(The following statement was released by the rating agency) LONDON, March 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 rating on Norway's senior unsecured local-currency bonds has also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign-Currency and Local-Currency IDRs at 'F1+'. KEY RATING DRIVERS Norway's 'AAA' IDRs and Stable Outlooks reflect the sovereign's strong balance sheet, current account surpluses, large net external creditor position, high performance on human development and governance indicators, and very high income per capita metrics. A robust macroeconomic policy framework and strong buffers afford the authorities considerable room to respond to low oil prices with an expansionary policy stance. Public finances are a key rating strength. Revenues from Norway's mature oil sector are channelled into the sovereign wealth fund, valued at 241% of mainland GDP at end-2016. The fiscal rule targets structural non-oil fiscal deficits financed from the sovereign wealth fund at 4% of the fund value each year, ensuring that non-oil deficits are limited to the expected return of the fund over time. The government is expected to tighten the fiscal rule to limit structural non-oil fiscal deficits to 3% of the fund's value. However, this may still result in fiscal loosening on average, if the value of the fund grows faster than GDP. The current fiscal stance is expansionary with the structural non-oil fiscal deficit in 2017 at 7.8% of mainland GDP, rising by 0.5pp. Fiscal policy is expected to become neutral as the structural non-oil deficit is expected to remain stable. There is an expected reduction in the corporate tax rate to 23% from 24% for 2018. The general government surplus fell to 3.1% of GDP in 2016 (2015: 6.0%), and is forecast by Fitch to remain stable at 3.0% over the forecast horizon. Low oil prices since 2014 have led to a decline in petroleum investments and demand in oil-related sectors. This has caused a slowdown in mainland (excluding oil and gas extraction and shipping) real GDP growth to 0.8% in 2016 (from an average of 2.8% for 2012-14), further dragged down by a fall in other non-oil related mainland exports in 2016. Private consumption and residential investments were the main drivers of 2016 growth, with especially strong construction and tourism activity benefiting from robust house price dynamics, low interest rates, and the weak krone. The five-year average for real GDP growth is in line with the 'AAA'-median at 2.0%, despite the severe oil price shock. A slight recovery and stabilisation of oil prices since 2H16 have improved the growth outlook, with a strong recovery in consumer confidence and Norges Bank's regional survey pointing to improved expectations for output in 2017. Fitch forecasts mainland GDP growth to pick up to 1.6% and 2.0% in 2017 and 2018 respectively, driven by a broad-based recovery and a smaller contraction in the oil sector. Inflation peaked at 4.4% in July 2016 due to pass-through from the weaker krone, as oil prices fell and Norges Bank cut key policy rates. Since July 2016, headline inflation has steadily moderated to 2.5% in February 2017 due to lower wage growth, a fading of the krone depreciation effect, and weak capacity utilisation. Fitch forecasts inflation to remain relatively stable at 2.5% for 2017, falling gradually to 2.1% in 2018. The adverse impact of the oil price shock on mainland economic activity has resulted in a rise in unemployment, especially in the regions more heavily dependent on oil activity. The unemployment rate peaked in 4.9% in July 2016, but has since moderated to 4.4% in December 2016. This compares well with the 'AAA' median unemployment rate of 5.7%. House prices grew by 96% nationally, and by 121% in Oslo, between 2005 and 2016, accompanied by robust growth in mortgage credit, resulting in gross household indebtedness rising to 235% of disposable income in 2016. Fitch assesses credit growth and household debt as latent risks to sovereign creditworthiness, although mitigated by the size and absorptive capacity of Norway's large fiscal buffers. The authorities have sought to tighten macro-prudential measures to cool the housing market. The counter-cyclical buffer will rise by 50bps to 2.0% from December 2017, a loan-to-income limit of 5x gross income and a loan-to-value cap of 60% for secondary dwellings in Oslo have been introduced, while the threshold for the 2.5% annual amortisation requirement has been lowered from a LTV of 70% to 60%. Additionally, criteria for construction permits have been eased to encourage housing supply. Fitch expects that these measures will go some way to stabilising the housing market. We do not expect severe financial instability as banks are well capitalised and non-performing loans are under 0.5% of total loans (and accruing mainly to the oil sector). Lenders' full recourse to borrowers and the practice of Norwegian developers to begin construction only after pre-sales reduces the likelihood of a sudden over-supply in the housing market, mitigating sharp falls in house prices. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Norway a score equivalent to a rating of 'AAA' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or fully reflected in the SRM. RATING SENSITIVITIES Fitch assesses Norway's credit profile to be solid, implying that negative rating action in the near term is unlikely. However, the following factors could, individually or collectively, put downward pressure on the ratings: - Risks to financial stability deriving from a severe macroeconomic shock, which would be amplified by excessive credit growth or household indebtedness. - A substantial erosion of Norway's sovereign and external balance sheet strengths over the medium term. KEY ASSUMPTIONS Fitch assumes that Brent oil prices will average USD52.5p/b this year and USD55.0p/b in 2018. Fitch assumes the Norwegian government will continue to adhere to its fiscal policy rule. Contact: Primary Analyst Eugene Chiam Director +44 20 3530 1512 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Secondary Analyst Marina Stefani Associate Director +44 20 3530 1809 Committee Chairperson Charles Seville Senior Director +1 212 908 0277 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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