Fitch Affirms Norway at 'AAA'; Outlook Stable

Fri Jun 21, 2013 12:35pm EDT

LONDON, June 21 (Fitch) Fitch Ratings has affirmed Norway's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. Both ratings have Stable Outlooks. Fitch has simultaneously affirmed Norway's Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'. KEY RATING DRIVERS Norway's 'AAA' rating reflects its high-value-added economy and robust institutional framework. The sovereign's strong balance sheet provides it with ample flexibility to deal with adverse shocks and an ageing population. Net general government financial assets amounted to 166% of GDP at end-2012, the highest of all 'AAA' sovereigns. North Sea petroleum revenues are prudently managed. Norway's strong policy framework has provided it with a long track record of macroeconomic stability. Mainland (ie non-oil) GDP growth has averaged 2.8%, and unemployment 3.5% over the past decade. The country's fiscal and current account surpluses, supported by oil exports, have both averaged 13.7% of GDP over the same period. However, the economy's high commodity dependence is, in and of itself, a rating weakness. RATING SENSITIVITIES Strong growth in property prices and household indebtedness in recent years raise the risk of a correction, in Fitch's opinion. Household gross debt stood at just under 2x disposable income at end-2012, the highest level on record. The household sector's debt/financial asset ratio in 2012 was 81%, compared with 33% in the eurozone. House prices grew by an average 12% pa from 2004-07, and are now 28% higher than their 2007 pre-crisis peak. This has been spurred by an environment of low interest rates, high wage growth and net immigration, and supply constraints, with valuation ratios now well above the long-term average. The government's ability to use its fiscal resources as a buffer against a possible downturn is much greater than in other advanced economies. This considerably mitigates the financial and economic risks of a correction. Fitch expects Norwegian banks would cope with a moderate fall in house prices without a significant increase in loan impairment charges. The agency has Norway on a Macro-Prudential Indicator status of '2', indicating a moderate vulnerability risk status with credit/GDP above its long-term trend by more than the 5% trigger. Fitch judges Norway's credit profile to be very strong, with a negative rating action in the near term unlikely. However, the following risk factors could, individually or collectively, put pressure on the 'AAA' rating: - A sustained oil price decline. This would represent a significant shock to Norway's mainland economy, which is leveraged to the petroleum sector. The high level of household indebtedness makes this sector vulnerable to such a shock and its associated falls in incomes and property prices. - Economic overheating. Further large increases in real wages, property prices and private sector credit would not be sustainable and would increase the risk of a sharp correction. - Ageing population. Over the longer term, failure to address the fiscal burden of ageing would lead to an erosion of Norway's fiscal position. Whereas Norway's sovereign wealth fund (SWF) would cushion the first two of these risk factors, it would be insufficient to pay for the cost of an ageing population over the long term. KEY ASSUMPTIONS The ratings and Outlooks are based on a number of assumptions. - Fitch assumes that the government will continue to manage Norway's public finances within the fiscal rule stating that at most 4% of SWF assets may be used on current expenditure each year. - Fitch assumes that the oil price will average USD105pb in 2013 and USD100pb in 2014-15. Furthermore the agency views the likelihood of a sustained collapse in prices to be low. - Fitch assumes that the eurozone (Norway's largest trading partner) will remain intact and that the eurozone crisis will not disrupt Norwegian banks' ability to access financing. - Fitch assumes the long-term real return in Norway's SWF will not be substantially lower than 3%-4%. Contact: Primary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Rob Shearman Associate Director +44 20 3530 1352 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 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 Methodology', dated 13 August 2012 and 'Country Ceilings' dated 13 August 2012 are available at www.fitchratings.com. Applicable Criteria andALL 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.