Norway: Risk Assessment
Country Risk Rating
Business Climate Rating
- Oil deposits
- Broad political consensus
- Well-capitalised banking system
- Large sovereign wealth fund (250% of GDP)
- Budget deficit excluding oil and gas revenues
- High household debt
- Significant labour costs
- Shortage of skilled manpower
Domestic demand is the main source of growth
After slowing slightly in 2018, mainly due to weak performance during the third quarter of the year, Norwegian growth is expected to pick up again in 2019. Activity will be boosted by household consumption, which will benefit from the gradual reduction in the unemployment rate (4% in September 2018) and an increase in wages. Another positive factor will be the reduction in inflation, driven notably by monetary policy tightening by Norges Bank, the Norwegian central bank. Private investment will be buoyed by the lower corporate tax rate and a high capacity utilization rate (79.2% in the third quarter of 2018). At the same time, real estate investment will continue to suffer from the high level of Norwegian household debt (236% of disposable income in 2017), and cooler growth in real estate prices. In addition, the slowdown in economic growth in Europe, particularly in the United Kingdom, could affect Norwegian exports (hydrocarbons, fish, aluminum, mechanical and electrical equipment and ships), since 21% of exports go to the UK. Mainland GDP, which excludes hydrocarbon production and shipping, is expected to grow by 2.7% in 2019. The energy sector – based on offshore oil and gas, and representing 17% of GDP, 19% of investments, and 43% of exports – will also contribute to the brighter pace of growth through oilfield development projects, such as the Johan Sverdrup project. However, despite the improvement in hydrocarbon prices, investment in exploring for new fields will remain moderate.
A solid financial situation that owes much to oil and gas
Fiscal policy is focused on promoting growth, creating jobs and diversifying the economy to reduce the country's dependence on the energy sector. In 2019, growth in budgetary spending is not expected to accelerate, allowing the government to post a comfortable surplus. However, the inclusion of the Liberal Party (Venstre) in the coalition government will result in increased spending on environmental protection. The budgetary rule limiting withdrawals from the sovereign wealth fund (SWF) to 3% of the fund’s return will be respected. In addition, the policy of attracting foreign investment is to continue, leading the government to lower corporate taxes, notably by reducing the tax rate by one percentage point (23% to 22%). Measures to expand tax bases, along with increased revenues from oil activities, will offset this decline. Despite the push to diversify the economy, the non-oil deficit will amount to 7% of GDP, illustrating the dependence of public finances on oil revenues and SWF dividends. The burden of public debt will remain moderate, in a country with the world’s largest SWF. However, the fund’s return on investment (ROI) seems to be on a downward phase, which raises questions about the future management of public expenditure, which is indexed to the ROI. In the second quarter of 2018, the fund’s ROI was lower than expected by the government.
The current account surplus is expected to remain high in 2019, mainly due to the goods balance, which stood at 5.5% of GDP in 2017. Indeed, despite the brisk showing by imports, reflecting vigorous domestic demand, exports – concentrated around oil, natural gas and salmon – will remain much higher. The current account surplus will also be supported by the income surplus (4% of GDP in 2017), linked to the wealth fund's foreign investments, while the deficit in transfers – attributable to the country's contribution to the European budget and aid to developing countries – will have an adverse effect. The current account surplus will likewise be reduced by the deficit in the balance of services related to oil production.
A fragile government
Following the parliamentary elections held in September 2017, the Liberal Party joined the Progress Party and the Conservative Party in the governing coalition in January 2018. When the Liberals came onboard, the government adopted a more environmentally-oriented programme, including protection for natural areas coveted by the oil industry. The Christian Democrats (KrF), meanwhile, refused to participate in the government. Despite the support of the eight Liberal MPs, the government therefore still has a minority in Parliament, holding 80 seats out of 169. However, on November 2, 2018, the KrF voted against supporting the opposition at an extraordinary party congress. The government still seems hopeful of getting the KrF to join the coalition, which would give it eight additional seats and thus a parliamentary majority. With this in mind, the government has proposed reforming the abortion law by banning terminations after the normal 12-week period, even in cases where the child might have a serious illness. The government is therefore fragile and could be brought down by the KrF’s position.