October 7, 2016 / 8:06 PM / a year ago

Fitch Affirms Norway at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 07 (Fitch) Fitch Ratings has affirmed Norway's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook. 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 and Local Currency IDRs at 'F1+'. KEY RATING DRIVERS Norway's ratings reflect the strength of the sovereign balance sheet, very high income per capita, and strong human development and governance indicators. A robust macroeconomic policy framework and strong buffers are allowing the authorities to respond to low oil prices with an expansionary policy stance. Low oil prices, resulting in declining investment in and lower demand from the oil industry have brought about a sharp slowdown in the broader economy. At the same time, there are tentative signs that the impact of this shock is easing. Quarterly GDP growth rates picked up in 1H16, while recent survey evidence points to an increased pace of real activity and improved consumer confidence. Mainland GDP (excluding oil and gas extraction and shipping) rose by 0.3% and 0.4% qoq in 1Q16 and 2Q16 in real terms. Fitch expects mainland GDP growth of 0.8% for 2016 as a whole. We then expect GDP growth to pick up to 1.6% in 2017 and 2.0% in 2018. We estimate that average real growth in the five years to 2016 has been in line with the 'AAA' median of 2%. Lower growth and the adverse impact of the oil shock on the non-oil economy have led to rising unemployment. On the standardised Labour Force Survey measure, the unemployment rate rose to 5.0% in July this year from 3.8% at end-2014. We expect unemployment to peak at the current level, before easing back over the next two years. Unemployment remains below the peer median of 5.8% for 2016. Recent cost and price developments point to downward pressure on real wages and incomes. The krone's depreciation in 2014 and 2015 pushed up import prices, leading to a rise in inflation beyond the central bank's target. We expect inflation on the harmonised HICP measure to average 4.1% this year before falling back to 2.1% by 2018, as the impact of the depreciation drops out of the annual inflation rate and with levels of real activity still below potential easing inflationary pressures. House price inflation on an annual basis slowed in 4Q15 and 1Q16, but the growth rate has picked up since, reaching 9.1% in August (with a marked dispersion across the country, with oil-producing regions still seeing price declines). Household debt as a share of disposable income reached 215% at end-2015, the highest level on record. Low interest rates imply that households' interest burden remains at historically low levels. Growth in credit to households has been stable, but growth in credit to corporates has slowed since 3Q15. Overall, the credit to GDP ratio has increased to 194% of GDP in 2Q16 from 192.6% a year earlier. Norway currently has a score of '2' (indicating moderate risk) on Fitch's Macro-Prudential Indicator (MPI) scale ranging from '1' (low risk) to '3' (high risk), and is one of only five out of 24 countries in the 'AAA' or 'AA' categories with a MPI score of 2. Fitch assesses credit growth and household debt as latent risks to sovereign creditworthiness, given the size and absorptive capacity of Norway's fiscal buffers. Bank asset quality is good, with the ratio of non-performing loans very low (1.2% at 1Q16 according to IMF data) even after the oil price shock. The Financial Supervisory Authority (FSA) has proposed a tightening of regulations on residential mortgage lending. The FSA proposes a tightening of the existing amortisation requirement, and the introduction of a debt-to-income limit of 5x gross annual income. Moreover, the amount of new loans for which banks could waive regulations (currently 10% of new loans) would be removed or retained at a lower level of 4%. The Ministry of Finance will respond to the proposals by year-end, with a view to their introduction from January. The Ministry of Finance presented its budget proposal for 2017 on October 6. The budget proposal envisages a non-oil structural deficit NOK225.6bn for 2017 (around 7% of total GDP). This is 3% of the forecast market value of the Sovereign Wealth Fund (SWF), and so consistent with the fiscal rule, which limits the non-oil deficit to 4% of the SWF. Ministry estimates suggest that the budget will provide a stimulus of around 0.4 percentage points to the economy. The budget proposal includes a moderate net cut in taxes amounting to NOK2.8bn (around 0.1% of total GDP). Fitch forecasts that the government's budget plans will translate in a decline in the general government surplus to 3.5% of GDP by 2018. 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 not fully reflected in the SRM. RATING SENSITIVITIES Fitch judges Norway's credit profile as 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 USD42p/b this year, USD45p/b in 2017 and USD 55p/b in 2018. Fitch assumes that the Norwegian government will continue to adhere to its fiscal policy rule. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 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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