Norway: Risk Assessment
Country Risk Rating
|A1||The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Economy sustained by consumption in the face of weak oil prices
There was a slowing in activity in 2015, reflecting the reduction in investments in oil and gas and other sectors. Growth in 2016 is expected to be slightly more buoyant. Low oil prices will continue to depress the oil and gas sector, which accounts for 20% of GDP, 30% of investments and 60% of total exports. Investments in this sector are expected to decline further, although at a slower pace than in 2015. It will therefore be domestic demand that will sustain economic growth thanks to public investments (less restrictive fiscal policy) and private consumption. This latter will remain strong (despite high household debt levels, 220% of gross disposable income) thanks to the low interest rate set by the central bank, rising property prices and wage growth (although at a slower rate than has been the case). The expected continuation of low oil prices has, however, undermined household confidence, which could have a negative impact on consumption. Unemployment rate should slightly increase, but this will still be at a relatively low level (4.6% of the work force). Non-oil exports could however benefit from the previous depreciation in the Norwegian krone against its principal trading partners. The construction (boosted by public investments) and fishing sectors will also help bolster the economy.
The two greatest risks are further falls in oil and housing prices, which would have negative consequences for household consumption. Norway could dig into the financial reserves of its sovereign fund, the biggest in the world in terms of assets (approximately 800 billion euros, 2.2 times GDP) in order to maintain economic activity.
The inflation rate will remain at a level near its target (2.5%) because of more expensive imported goods (depreciation of its currency) and wage rises.
Small debt and deficit, large current account surplus
The current account surplus is expected to shrink slightly in 2016, essentially because of the contraction of the balance of trade in goods and services surpluses. Domestic demand will increase the amount of imports, which will grow at a faster pace than exports. This latter should benefit from the earlier depreciation of the currency, but are likely, however, to be weakened by the decline in oil and gas exports, which account for one-third of total exports.
In its 2016 budget, the government introduced a series of measures aimed at reducing dependence on natural resources in a context of low prices. The main elements include a reduction in corporation tax (from 27% to 25% and finally 22% by 2018) and income tax in order to increase the attractiveness of non-oil investments and support private consumption. The budget also includes finance for infrastructure projects and specific measures for stimulating employment, improving productivity and competitiveness. The 2016 budget will thus have a twofold impact on spending (up) and revenues (down, intensified by the oil effect). The budget surplus is thus expected to shrink, whilst still remaining at an extremely comfortable level relative to other OECD countries. Public debt will also reduce.
The most recent stress tests indicated that the banking system was sufficiently resilient, following a doubling of its capital since the 2008 crisis.
A Stable political system
With the 2016 budget, the Prime Minister Erna Solberg, elected in September 2013, is hoping to reinvigorate the economy ahead of the parliamentary elections of September 2017.
Norway dropped one place to eighth in the latest World Bank Doing Business ranking. The institution felt that there had been deterioration in conditions for obtaining credit and the process for starting a business.